UBS says Asia's rich show less love for Aussie: Australia Credit

[SYDNEY] 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 74 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," Smiles said in an interview on Monday. "From the third quarter of last year, there's a growing belief that the U.S. dollar would start a sustained appreciation trend." The Aussie has tumbled 16 percent 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 fallen 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," Societe Generale's 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 little changed at 79.24 cents at 12:42 pm in Sydney after declining on Monday to 78.55 cents, the weakest since July 2009. Forecasters see it ending the year at 78 cents, according to the 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 also loosen monetary policy. There's a 40 per cent chance it will lower borrowing costs on Feb 3, up from about 25 per cent odds on Jan 16, interest-rate swaps show.

Central bank chief 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 weaker Australian dollar is easing monetary conditions for the RBA," David Forrester, senior vice president for Group of 10 foreign-exchange strategy at Macquarie Group Ltd. in Singapore, said on Monday. "The RBA would prefer to ease monetary conditions via the currency rather than having to cut rates and risk generating asset bubbles." Inflation Swaps Yields on Australian five-year inflation swaps, which signal expectations for consumer prices, dropped to a five-year low of 2.12 per cent on Monday, 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 at its two-day meeting starting today, 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. Some 45 per cent of 53 economists in a Bloomberg survey said the central bank will raise the benchmark lending rate in June. Six per cent said July, while 30 per cent said the Fed will wait until September for the first increase since 2006. Fed officials last month said they expect to raise the rate this year.

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

BLOOMBERG