Hedging by Australia's pension funds set to boost local currency
SYDNEY: The Australian dollar is set for further gains as the nation's biggest pension funds have reason to boost hedging of their US assets to shield them from policy uncertainties.
Tariff risks and bets that the Federal Reserve will cut interest rates should weaken the greenback, according to Ray Attrill, head of foreign-exchange strategy at National Australian Bank.
Aussie pension funds may then have to increase currency hedging for their US assets, he said.
'I'm reasonably convinced we will get a 'risk negative' response to the reality of a much more draconian tariff regime globally than we have today,' said Attrill, who expects the Aussie to rise by almost 3% by year-end.
Australian super funds play a critical role in underpinning demand for the local dollar, given their A$4.1 trillion (US$2.7 trillion) asset base and offshore exposure.
There are also signs that some, including AustralianSuper, are reconsidering their allocations to the US as President Donald Trump attempts to remake global trade.
The Aussie, which has risen against most its Group-of-10 peers this month, may also get a boost from second-quarter inflation data due on Wednesday.
The Reserve Bank of Australia's (RBA) unexpected decision to keep rates on hold this month has helped maintain a base for the currency, and 'Aussie dollar/US dollar remains well supported above key moving averages around 0.64,' said Troy Fraser, head of foreign-exchange sales for Australia and New Zealand at Citigroup Inc.
Faster-than-expected inflation may see traders dial back their current bets for more than two quarter-point rate cuts by the RBA this year, especially as the central bank has said it's pursuing a 'cautious and gradual' policy stance.
The Australian dollar 'remains on track to meet or exceed our year-end target of 0.67,' Lachlan Dynan, macro strategist at Deutsche Bank, wrote in a note to clients last week.
Increased super fund hedging is 'an upside risk' for the currency, he added. — Bloomberg
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