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RPT-Aussie, kiwi face further selling as yield demand fizzles
October 20, 2014 / 6:33 PM / 3 years ago

RPT-Aussie, kiwi face further selling as yield demand fizzles

(Repeats without change to text)

By Naomi Tajitsu

WELLINGTON, Oct 20 (Reuters) - The Australian and New Zealand dollars could fall further as demand from "real money" asset investors fizzles and buying by central banks dries up, removing support that had bolstered the currencies during times of selling.

Investors sold the so-called Aussie to a four-year low of $0.8642 against the U.S. dollar this month, while the New Zealand dollar - or kiwi - has tumbled more than 10 percent since July to trade around $0.7900, from a post-float high around $0.8800.

Behind the selling is a fall in commodity prices and growing expectations that U.S. interest rates will start rising around the middle of 2015, which would make the so-called carry trade that has supported both currencies less attractive.

Carry trades involve investors using U.S. dollars, yen and other low-yielding currencies to buy assets denominated in high-yielding currencies - such as the Australian and New Zealand dollars.

Investors moving into U.S. dollars ahead of expected U.S. rate rises have been behind the greenback's rally in the past month.

"We've been long on the U.S. dollar this year mainly versus the Aussie," said Steve Miller, head of Australian fixed income investments at Blackrock in Sydney. "It would be fair to say we've been increasing this position a little bit more in the last four to six weeks."

Blackrock, the world's largest asset manager, oversees $17 billion in Australian fixed-income holdings, and expects the Australian central bank cash rate to stay at 2.5 percent for the next year, meaning higher U.S. rates would make the carry trade less profitable. Blackrock has no exposure to New Zealand.

Analysts said lower global prices for iron ore, dairy products and other materials would also weigh on the commodity-linked Antipodean currencies.

A Reuters poll earlier this month forecast that the Aussie would fall further to $0.8500 and the kiwi would drop to $0.7500 in 12 months' time.

This year's near 50 percent fall in dairy prices has rocked the New Zealand dollar, while expectations that the country's central bank will temper the pace of rate rises from earlier this year looks set to slow down the kiwi carry trade.

Carry demand for the kiwi picked up before the Reserve Bank of New Zealand started to raise its overnight cash rate in March, hitting 3.5 percent in July.

Demand from yield-hungry Japanese retail investors was especially strong, prompting the launch of kiwi-denominated investment trusts, such as a $225 million fund by Nikko AM in February.

These investments helped keep the kiwi around a 6 1/2-year high near 90 yen for much of the year before it eased to around 85.00 yen by Monday.

Overall, retail demand has slowed from last year, cutting the net value of kiwi-denominated trusts by around 18 percent compared with mid-2013, data from the Investment Trust Association of Japan shows.

"I would think that the rate of investment would be more modest than what we've seen over 2014. We're still confident there will still be a positive inflow, but maybe not to the same extent as what we've seen," said Fergus McDonald, head of New Zealand currency and fixed income at Nikko Asset Managers.

He said Nikko did not expect New Zealand rates to rise again until the first quarter of next year at the earliest.

SLOWING DIVERSIFICATION FLOWS

Dwindling appetite from foreign central banks also removed support for the currencies, particularly the Aussie, which had benefited since 2008 from foreign central banks diversifying their holdings away from U.S. dollars and euros.

Analysts said that central bank demand for Aussie-denominated assets had largely stalled this year, after central banks had steadily increased their holdings over the past few years.

IMF quarterly official foreign reserve holdings data out this month shows that while the share of Aussie assets has risen slightly this year, the increase seen in the first two quarters of 2014 was due to a rise in the currency's value and not increased investment.

The data shows a steady, incremental fall in the share of U.S. assets held by central banks around the world since 2008 as the banks have spread their currency exposure and official reserves have risen to record highs. (Reporting by Naomi Tajitsu; Editing by Eric Meijer)

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