Add a resurgent carry trade to the list of things keeping Reserve Bank Governor Glenn Stevens from getting a weaker Aussie dollar.
A widening yield advantage on the nation’s debt amid a drop in currency volatility is luring investors back to the strategy. Borrowing equally in yen and euros to buy Aussie earned 1.6 per cent this month, after the same trade lost money in the first quarter. Expectations for swings in the Aussie are approaching the lowest levels this year as there is some speculation of the timing of any US or Australian rate changes.
“In a world of zero and negative yields, Aussie stands out as king — or if not king, certainly a member of the royal family,” said Robert Rennie, Westpac’s global head of currency and commodity strategy. “Carry is here to stay for the foreseeable future.”
Finance companies get paid to borrow money for a month in euros and yen in international markets and can use that cash to buy 10-year Aussie sovereign debt yielding 2.35 per cent. The RBA has raised concerns that central bank bond-buying will prop up the Aussie at a time when the local exporters need depreciation to cope with slumping prices of iron ore, the country’s biggest export earner. The local dollar headed for its strongest two- week gain in a year as Germany’s average yields dropped below zero for the first time.
Japanese investors bought a net 345 billion yen ($3.7 billion) of Australian sovereign debt in February, the most since August 2011, Japan’s Finance Ministry said.
Excluding debt held by the RBA, central banks owned 29 per cent of Australia’s public debt as of December 31, according to the International Monetary Fund. Overall, foreign investors owned 67 per cent of the total, a level Barclays calls “very high.”
“Japanese and European investors still stand out,” said Kieran Davies, Barclays’s Sydney-based senior economist. “Relative to other currencies, our interest rates are quite attractive.”
The premium offered by Aussie debt over its triple A-rated peers rose to 1.59 percentage points last week, the most in five weeks, and was headed for its biggest monthly increase since November 2013.
Global demand for Aussie assets is a problem for Stevens as he continues the call for a weaker currency in the midst of a buoyant property market. Swaps traders lay 67 per cent odds of a quarter percentage point cut to a record low 2 per cent at the RBA’s meeting on May 5. The RBA made its first move in 18 months in February by cutting the key benchmark rate a quarter point to 2.25 per cent.
Stevens identified US75¢ as his preferred exchange rate at the end of last year, before an additional 30 per cent plunge in iron ore to below $US50 per ton. The currency fell as low as 75.33¢ on April 2 before rebounding to as high as US78.22¢ last week. At 7:30am, the Aussie traded at US78.07¢.
“Stevens will have a lot to consider in May, and if the Aussie isn’t falling, that’s one one more problem for him,” said Stan Shamu, a markets strategist at IG. “With the Aussie yielding at these levels, there’s still that opportunity for people to benefit.”
Beyond Australia, the US Federal Reserve’s caution over raising US rates for the first time since 2006 is also supporting the Aussie, and not simply because the greenback’s rally has stalled.
Société Générale analysts argue the Fed’s message has calmed currency markets, giving investors confidence that currency swings won’t upend their carry trades.
A gauge of implied volatility in the Aussie-yen rate over the coming 12 months slid to 10.55 percentage points Friday, the least since Jan. 14. The equivalent measure for the euro- Aussie dipped to 10.06 on April 9, the lowest since Jan. 16.
“The Fed frankly does not want to rock the boat too much,” said Alvin éan, a foreign-exchange strategist at Société Générale in London. “Anything with yield is a winner.”