UBS says Asia's rich show less love for Aussie

[SINGAPORE] Asia's wealthy are falling out of love with the Aussie dollar as record-low yields and sustained declines persuade them to look elsewhere, according to UBS Group AG.

Many of the bank's wealthiest clients in the region began to abandon the currency as Australia's bond yield premium over the US slid and the Federal Reserve discussed raising interest rates, said Simon Smiles, Zurich-based chief investment officer for ultra-high-net-worth individuals. The 10-year yield is 84 basis points above that of the US, down from 130 a year ago.

"Two years ago when I came to the region, in most client meetings, people were asking about Aussie assets, the Australian dollar, yield play; when you talk about it now, there's almost no interest," Mr Smiles said in an interview this month in Singapore.

"From the third quarter of last year, there's a growing belief that the US dollar would start a sustained appreciation trend."

The Aussie has tumbled 16 per cent in the past six months to the weakest level since 2009 and Reserve Bank of Australia Governor Glenn Stevens has said he expects it to extend declines. The local dollar has weakened less than the euro and the currencies of Denmark, Canada and Norway this year and "should be the next domino to fall," said Olivier Korber, a strategist at Societe Generale SA in Paris.

Australia has been struggling with the end of a once-in-a- century resources boom and a slowdown in China, which buys more than 35 per cent of the South Pacific nation's exports. A Deutsche Bank AG index tracking the prices of commodities important to Australia has tumbled 30 per cent in the past 12 months with iron ore and thermal coal sliding to multi-year lows.

China's economy grew 7.4 per cent in 2014, the slowest pace in 24 years. The expansion will weaken to 7 per cent this year, according to the median estimate in a Bloomberg News survey.

"The biggest structural concern for Australia and the currency is probably the landing of the Chinese economy amid falling commodity prices," Mr Korber said in an e-mail interview on Jan 23.

Australia's dollar is set to end the year at 77 US cents, he said. An earlier-than-expected decline below this level may accelerate its descent toward 70 cents, he said.

The Aussie was at 78.95 cents at 5 pm in Sydney on Monday after declining to 78.55 cents, the weakest since July 2009. Forecasters see the currency ending the year at 78 cents, according to median estimate in a Bloomberg survey.

The Bank of Canada's unexpected decision to cut interest rates last week and the European Central Bank's announcement of a bond-purchase program have spurred traders to increase bets the RBA will loosen monetary policy.

There's a 46 per cent chance the central bank will lower borrowing costs on Feb 3, up from about 25 per cent odds on Jan 16, interest-rate swaps indicate.

Central bank chief Mr Stevens last month signaled the cash rate will remain unchanged for the foreseeable future.

The currency will probably extend losses this year, he said in an interview with the Australian Financial Review published Dec 12, saying a level of 75 cents would be better than 85.

The RBA is unlikely to rule out rate cuts to keep the currency weak, said David Forrester, senior vice president for Group of 10 foreign-exchange strategy at Macquarie Group Ltd. in Singapore.

"The weaker Australian dollar is easing monetary conditions for the RBA," he said. "The RBA would prefer to ease monetary conditions via the currency rather than having to cut rates and risk generating asset bubbles."

Yields on Australian five-year inflation swaps, which signal expectations for consumer prices, dropped to a five-year low of 2.13 per cent on Jan 23, toward the lower range of the central bank's inflation target of 2 per cent to 3 per cent.

A further decline in the Aussie will depend on what the Fed says about the US dollar when it meets Jan 27-28, Mr Forrester said.

While Macquarie expects Australia's currency to weaken to 78 cents in three months, there's a risk the Fed "could talk down" the US dollar, providing a respite for its Australian counterpart, he said on Jan 26.

Bloomberg's dollar gauge is set for its seventh monthly gain as the Fed moves toward raising interest rates.

"The Australian dollar has fallen on a total return basis, lost people money and there's an expectation that it will continue to depreciate," UBS's Mr Smiles said.

"Clients see it as a fairly compelling reason not to be invested there."

BLOOMBERG