KEY POINTS:
Anyone who likes the Canadian dollar for its resource-rich and balanced-budget economy should be embracing the Australian dollar for the same reasons - and the additional prospect of rising interest rates, according to the bond market's biggest international investors.
Even after the aussie reached a 23-year high against the US dollar last week, investors say the rally is unstoppable amid record exports and unprecedented prices for coal and iron ore. The currency is getting an additional boost from the Reserve Bank of Australia, which shows no inclination to relax a monetary policy focused on curbing inflation.
"We've been increasing our aussie dollar positions," said Stephen Miller at BlackRock Investment Management, a unit of the biggest publicly traded money manager. "Unlike a number of other central banks around the world, the Reserve Bank of Australia retains a tightening bias."
While 40 of 41 strategists predict the rally is over, BlackRock expects gains of 5 per cent by June because the A$1 trillion ($1.17 trillion) economy depends on Asia for most of its exports, insulating Australia from the fallout of the worst US housing slump since the 1930s. The country relies on Asia for 60 per cent of overseas sales and the US for 6 per cent, government data shows. Canada sends more than 80 per cent of its goods to the US.
Tokyo-based Daiwa Asset Management and Kokusai Asset Management, the largest investors in Australian bonds among funds that disclose holdings, said they bought more of the country's fixed-income securities last month.
The aussie has climbed 10 per cent since August, the biggest gain among the 17 most-active currencies.
The currency will reach parity with the US dollar by the end of 2008, a gain of 11 per cent, Toronto-based TD Securities said last week.
Canada's dollar reached that milestone for the first time since 1976 on September 20. Besides a rising currency, investors also enjoy higher yields. Australia's benchmark two-year bond pays about 6.50 per cent, or 2.43 percentage points more than Treasuries of similar maturity.
Australian Government bonds returned 22 per cent in the past year for US-based investors when the rise in the currency is considered, according to an index compiled by Merrill Lynch. For investors in Japan, they returned 21 per cent. "Australia's economy is healthier than the US," said Tsutomu Komiya, manager of the Daiwa Oceania Bond Mother Fund in Tokyo. "I'm bullish on the currency."
The International Monetary Fund last month raised its forecast for economic growth in 2007 to 4.4 per cent, the fastest since 2003, from 2.6 per cent in April. The US economy may expand by 2 per cent, the IMF in Washington said.
The rally in Australia's dollar stalled in August as concerns about losses on securities tied to US subprime mortgages spread around the globe. The currency tumbled 3.9 per cent, the most since April 2004, as fund managers reduced investments financed with debt. That included carry trades, in which investors borrow in a country with low rates such as Japan and invest in one with high yields. Japan's benchmark interest rate is 0.5 per cent.
Currency strategists responded by reducing their year-end forecasts, bringing the median estimate of 40 analysts to A82c on September 12 from A86c a month earlier. The median now is A85c.
"There's a good chance in the coming three months we're going to see another increase in risk aversion and a weakening in the Aussie," said David Forrester, a currency economist in Singapore at Barclays Capital, the world's fifth-biggest foreign-exchange trader. The firm forecasts A82c by year-end.
The US Federal Reserve helped revive demand for high-yield assets by cutting its target rate for overnight loans between banks on September 18 to 4.75 per cent, from 5.25 per cent. The rate is 1.75 percentage points less than Australia's benchmark.
Bloomberg
