BRISBANE: Australia’s second-largest pension has built its biggest “overweight” position in the Japanese yen in years, betting that markets are underpricing Bank of Japan (BoJ) interest rate hikes.
Australian Retirement Trust (ART), which manages about A$370bil (US$265bil) of savings, has spent the past six months adding to the trade as the yen weakened toward 160 per US dollar – funded partly by trimming its exposure to the greenback, Jimmy Louca, a senior portfolio manager, said in an interview.
The move is a rare bullish bet on the yen when many investors are looking to sell it.
The currency hit a 40-year low last month as traders bet the BoJ will be slow to raise rates while energy costs stay elevated.
Louca thinks the market only got part of it right – the drag from higher energy prices is priced in, but the odds of BoJ rate hikes look too low.
“Any reversion in those two factors should support the yen. We’ve actually now moved to position ourselves ‘overweight’ in the Japanese yen, which looks very cheap.”
Swaps are pricing in about an 80% chance of a BoJ rate hike in September, with a move fully priced by October, according to data compiled by Bloomberg.
Louca sees scope for the central bank to raise rates next month and potentially signal two hikes before higher energy prices complicate its path, particularly if the Middle East conflict escalates after the US midterm elections in November.
“If they deliver mostly on that, I think the market could move higher in terms of Japanese yields,” Louca said.
The “overweight” yen position is part of ART’s dynamic asset allocation programme, which applies across all its diversified options. In the fund’s high-growth option, the trade accounts for about half a percentage point. Louca sees the fair value for US dollar-yen at around 150, potentially reaching the high 140s. The yen is now at 159.21.
He also draws a contrast between United States and Japanese intervention in currency and bond markets.
In Japan, he says authorities are essentially buying time until higher interest rates can support the yen.
“In the United States, efforts to hold down Treasury yields are going against underlying fundamentals,” he said.
That scepticism toward US assets is reflected in ART’s bond portfolio.
The fund has an “underweight” of about half a percentage point in US Treasuries amid above-target inflation, resilient growth and competition for capital from the artificial intelligence investment boom – factors Louca sees pushing term premiums and yields higher.
“We view the latest Operation Twist from the Treasury Department as only delaying rather than preventing further upward pressure on yields,” Louca said. “We would see 30 years having, you know, further upward momentum toward that 5.5% mark. I think the market is starting to move there in terms of the debasement view.”
US 30-year borrowing costs touched a near two-decade high last week, before the Treasury surprised markets with plans to increase buybacks of longer-dated debt.
Yesterday, the 10-year yield was little changed at 4.63%, while the 30-year was at 5.17%. Australia’s A$4.4 trillion pension system is the world’s fastest-growing pool of retirement savings.
Funds face close regulatory scrutiny, including an annual performance test that measures returns against key benchmarks. — Bloomberg
