By Ye Xie and Candice Zachariahs
March 30 (Bloomberg) -- Investors are the most bullish on Australian and New Zealand dollars since 2003, anticipating that spending on commodities will increase as central banks print unprecedented amounts of cash to rescue their economies.
Nineteen of the largest developed economies are spending 43 percent of their average gross domestic product to end the worst economic crisis since the Great Depression, the International Monetary Fund said March 6, adjusting for cost-of-living variances. The Group of 20 nations’ debt will jump next year to 77 percent of GDP, up 11 points from 2008, the IMF report said.
Aberdeen Asset Management, Hermes Pension Management Ltd. and Kokusai Global Sovereign Open Fund figure that new money will spur demand for everything from iron ore and oil to wool, so they’re buying Aussies, kiwis and Norwegian kroner.
“With the announcement of more and more printing of money, ultimately, consumers and banks will realize they want to get the cash out of their pockets,” said John Brynjolfsson, chief investment officer of Armored Wolf LLC. in Irvine, California, in a March 25 Bloomberg Television interview. “The goal is to halt deflation. We’ve got to shift into real assets.”
Options to buy the Australian dollar in the next month cost as much as 0.5975 percentage point more than contracts to sell on March 24, the most since October 2003, according to data compiled by Bloomberg. The so-called risk reversal rate also favored New Zealand dollar purchases the following day, reaching a six-year high of 0.35.
Solo Intervention
The shift followed the Federal Reserve’s March 18 announcement that it would buy as much as $300 billion in Treasuries, joining the U.K. and Japan in a campaign of so- called quantitative easing, after failing to spur growth by dropping benchmark interest rates almost to zero. Switzerland’s central bank started selling francs on March 12 to pump money into the banking system, its first solo intervention since 1992.
Dollars, yen, francs and pounds dropped as much as 3.2 percent against their main trading partners this month as central banks increased supplies, according to the Bank of England.
In the U.S., the easing measures have helped increase the so-called M2 money supply -- all currency, checking and savings account deposits, private holdings in money market accounts and term deposits -- to nearly $8.3 trillion as of March 16, 9.8 percent more than a year earlier. That followed February’s 10.5 percent increase, the highest since December 1983.
‘Start Burning It’
“If you put any more money into the system, you’d have to start burning it,” said New Jersey’s Democratic Governor Jon Corzine, 62, in a March 26 Bloomberg News interview. “We’re getting closer to the zone” where “people feel slightly more comfortable with the economy and stop hiding it under the mattress,” said Corzine, who was chairman and then co-chairman of Goldman, Sachs & Co. from 1994 to 1999.
Resource-rich countries’ currencies are benefiting from the anticipated flood of cash as raw material prices rise. The Reuters/Jefferies CRB Index of 19 commodities gained 5.1 percent this month, the biggest rally since June 2008. Crude oil last week topped $54 a barrel for the first time in almost five months.
The New Zealand dollar, nicknamed the kiwi for the country’s flightless bird, appreciated 9.6 percent this month on a trade-weighted basis, its best rally since at least 1985. It reached a 2 1/2-month high of 58.02 U.S. cents on March 26 and traded at 56.66 cents as of 10:02 a.m. in Tokyo.
New Zealand is the world’s second-largest wool supplier, behind Australia, and home to Auckland-based Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter. Dairy and meat products make up a third of the nation’s exports, according to Statistics New Zealand.
Aussie
Australia’s dollar, nicknamed the Aussie, gained 8 percent against the greenback in March, the biggest advance since September 2007. It touched 70.94 cents versus the U.S. dollar on March 24, the highest since January, and bought 68.95 U.S. cents today. The country is the world’s largest shipper of coal and iron ore.
The krone has gained 6 percent against the dollar this month in its biggest advance since September 2007, hitting 6.2575 on March 24, its strongest since October. Norway is the world’s fifth- and third-largest exporter of oil and gas, respectively.
BNP Paribas and Barclays Capital Inc. said the Aussie, kiwi and the krone will rise as much as 13 percent by September. Credit Suisse Group AG raised its three-month forecast for the Aussie on March 26 to 75 cents from 60 and its kiwi estimate to 59 cents from 46. HSBC Holdings Plc says the krone will appreciate 12 percent to 5.86 per dollar in six months.
‘Fairly Negative’
Matthew Cobon, head of currencies in London at Aberdeen Asset Management, said he bought the Aussie against the U.S. currency because of the Fed’s quantitative easing.
“In the short term we still think this is a fairly negative event for the U.S. dollar,” said Cobon, whose company manages about $158 billion.
Commodity currencies are the second biggest holding, after the Swedish krona, in a foreign-exchange fund run by Momtchil Pojarliev, the London-based head of currency at Hermes Pension Management Ltd., which oversees about $39 billion. “I think the dollar will remain weak,” Pojarliev said.
The Kokusai Global Sovereign Open Fund in Tokyo added to its holdings of Canadian dollars, Australian dollars, Norwegian krone and Swedish krona in the past two months, said Masataka Horii, one of the $47.9 billion pool’s four managers.
Inflows, Outflows
Increased interest in kiwi and Aussies began before the Fed’s March 18 announcement. Inflows into the currencies that day and the previous four were higher than in 80 percent of all five-day periods since 1997, said Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC. The U.S., Switzerland and the U.K. saw currency outflows.
Stronger currencies may hurt commodity countries’ companies like Air New Zealand Ltd. in Auckland, the nation’s biggest airline. Chief Executive Officer Rob Fyfe said in a conference call in February that a weaker kiwi would boost profits in this year’s second half after a 76 percent drop in net earnings during the second half of 2008.
Goldman Sachs Group Inc. said central banks need to do more to defeat deflation and revive growth.
The median estimate of 50 economists in a Bloomberg survey forecasts U.S. consumer prices will drop at an annual rate of 1.7 percent in the third quarter. To reach 2 percent inflation by then, the Fed’s benchmark rate would have to fall almost 6 percentage points, according to a model known as the Taylor Rule, which a 2007 Federal Reserve Bank of Kansas City report said has had “considerable influence” on policy since Stanford University economist John Taylor devised it in 1992 to help set rates.
Fed’s Balance Sheet
With the Fed’s target interest rate for overnight loans between banks already at zero to 0.25 percent, it can only achieve that level of easing with new money -- at least $1 trillion more on its balance sheet for each one-point drop, Goldman Sachs said in a March 11 report. The Fed has increased its assets by 133 percent from a year ago to $2.07 trillion, or 15 percent of U.S. GDP.
“Nothing is sustainable in this environment,” said James Dutkiewicz, who manages C$5 billion ($4 billion) in fixed-income assets at CI Investments Inc. in Toronto, Canada’s second- largest mutual-fund manger. “Yes, I do think over the next years, commodity and commodity currencies should do well. Between now and summer, it’s hard to tell.”
‘The Anti-Money’
“If there were Mars dollars that we could buy against earth money, I would,” said Kit Juckes, head of fixed-income research at Royal Bank of Scotland Group Plc in London. He recommends gold as an alternative because “when you increase the amount of money, then money has to be worth less relative to something else” and “gold is anti-money.” He predicts gold will hit $1,000 an ounce in coming months from $924 on March 27.
The median estimate from 47 economists surveyed by Bloomberg predicts deflation will give way to inflation of 1.9 percent in 2010. The difference in yields between 10-year notes and Treasury Inflation Protected Securities, or TIPS, signaled the highest concern about inflation in five months, at 1.50 percentage points on March 27. The spread was zero at the beginning of the year.
Barclays, the world’s third largest foreign exchange trader, said in a March 25 note that investors should consider commodities and commodity currencies as hedges against inflation.
“The unprecedented injection of liquidity raises the possibility that inflation will be revived, if not in the short term, then down the road,” said Steven Englander, London-based Barclays’s U.S. currency strategist in New York, in the report. “In the past, commodity currencies have either led or mirrored rises in inflation.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.netCandice Zachariahs in Sydney at czachariahs2@bloomberg.net
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