Japanese pull out of safe haven
Over the past few years, with the euro crisis sparking fears of a break-up of the eurozone, Japan's investors slashed their holdings of European assets while pouring billions of dollars into Australia.
While the Australian dollar has traded persistently high against the US dollar, it has started to pull back from the euro, falling nearly 10 per cent since August.
But Westpac's chief currency strategist, Robert Rennie, said as conditions in Europe stabilise there were signs that behaviour had started to change.
"We have long believed that investors were overplaying European break-up risks and that the policies announced by the European Central Bank in late 2011 through 2012 would be successful in reducing the perception of those risks and hence influence investor behaviour," he said in a note to clients.
"One of the obvious implications of this would likely be that 'safe haven' demand for Australian dollar debt from [Japanese investment funds] would fall."
Mr Rennie pointed to data showing the percentage change in foreign currency assets held by Japanese investment trusts.
The value of foreign currency assets owned by Japanese investment trusts surged to more than $US300 billion in early 2012, from $US28 billion in 2001.
Through much of the past decade, Japanese investors held roughly 25 per cent of those ever-expanding foreign assets in Europe. That changed dramatically from 2010, when Japanese investors began to slash their euro holdings and demand safe haven currencies such as Australian, Canadian, and New Zealand dollars.
But recent data shows Japanese ownership of Australian assets dropped late last year to lows similar to August 2010. At the same time, ownership of euro assets started to rise.
Mr Rennie said data suggested that the euro should continue to rise against the Australian dollar.
After hitting a high of 85.88 euro cents in August last year, the Australian dollar is now trading around 77.5 euro cents, a decrease of nearly 10 per cent.
The Australian dollar was trading at US104.24¢ on Monday.
The prediction comes as Japan's government on Monday said its economy was expected to expand by 2.5 per cent in the coming fiscal year starting in April, thanks to the huge stimulus program it announced last week and the continuing recovery in key overseas markets.
The forecast, which was approved by Prime Minister Shinzo Abe's cabinet, is higher than the estimated 1 per cent growth for the current fiscal year ending in March.
Frequently Asked Questions about this Article…
The article says Japanese investors shifted into 'safe haven' currencies like the Australian dollar during the eurozone crisis. As conditions in Europe have stabilised and perceptions of a euro break-up have eased, Westpac's currency strategist Robert Rennie says that demand from Japanese investment funds for Australian dollar debt has started to fall.
According to the article, the value of foreign currency assets held by Japanese investment trusts surged from about US$28 billion in 2001 to more than US$300 billion in early 2012.
Robert Rennie told clients that investors had likely overplayed euro break-up risks and that policies announced by the European Central Bank in late 2011 and through 2012 would reduce those risk perceptions. He said this shift in sentiment would likely lower safe-haven demand for Australian dollar debt and that the euro should continue to rise against the Australian dollar.
The article reports the Australian dollar fell nearly 10% against the euro since hitting a high of 85.88 euro cents in August last year, trading around 77.5 euro cents at the time of the report.
The article notes the Australian dollar was trading at US104.24¢ on the Monday referenced in the story.
During the eurozone crisis, Japanese investors slashed euro holdings and poured billions into currencies perceived as safe havens — notably the Australian, Canadian and New Zealand dollars — as a hedge against eurozone uncertainty.
The article suggests that ECB policy measures introduced in late 2011 and through 2012 reduced fears of a euro break-up. That reduction in perceived euro risk is likely to change investor behaviour and decrease safe-haven flows from Japanese funds into Australian dollar assets.
Japan’s government told investors its economy was expected to expand about 2.5% in the coming fiscal year — a forecast approved by Prime Minister Shinzo Abe’s cabinet — citing a large stimulus program and recovering overseas markets. Improved Japanese economic prospects could affect Japanese investor sentiment and their foreign asset allocations.
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