Major Australian Pension Fund Boosts Australian Dollar Holding, Citing Undervaluation

A prominent Australian pension fund has significantly increased its hedging strategy on international equities, highlighting that the Australian dollar (AUD) is currently undervalued. This decision comes as the Reserve Bank of Australia (RBA) tightens interest rates, while most major economies hold rates steady or plan to reduce them.

Jeff Brunton, Head of Portfolio Management at HESTA, which manages A$100 billion ($70.15 billion), confirmed that the fund has been purchasing more Australian dollars to hedge its portfolio. According to Brunton, the long-term valuation models for the Australian dollar have consistently indicated that it is undervalued.

HESTA’s Long-Term Strategy for Currency Hedging

Brunton emphasized that HESTA, as a long-term investor, is driven by valuations. Their models suggest that the Australian dollar is currently undervalued, making it an attractive asset to increase holdings in. “If we hold international equities and the Australian dollar rises, the value in Australian dollars of those international equities would fall. But the hedge protects the portfolio in that environment," said Brunton in an interview with Reuters.

HESTA’s decision to hedge and increase Australian dollar exposure contrasts with typical U.S. equity investors, many of whom have little currency hedging in their portfolios due to the expectation that the U.S. dollar will rise during negative economic shocks.

Other Australian Pension Funds Follow Suit

HESTA is not alone in this strategy. The Australian Retirement Trust, the second-largest pension fund in the country, has also recently increased its hedging strategies, further contributing to upward pressure on the Australian dollar.

The move to buy more Australian dollars to hedge international equity portfolios could potentially push the currency higher, analysts believe.

Australian Dollar on the Rise

The Australian dollar saw a significant surge last month, rising by 4.3% to its highest level in three years. In February, the currency has continued its upward trend, gaining nearly 1%. This rise has been largely driven by the broader economic environment in Australia, where the trade surplus has expanded due to climbing commodity prices.

The Reserve Bank of Australia raised its official cash rate by 25 basis points to 3.85% last week, positioning Australia as one of the few countries that are tightening rates amid a global trend of rate cuts or holds.

Growing Speculative Interest in the Aussie Dollar

Investors have been eyeing the Australian dollar for years, with increasing commodity prices and rising government bond yields making the currency more appealing. Benchmark 10-year government bond yields in Australia are the highest in the G10, and at the three-year tenor, the yield advantage over the U.S. is at its widest in nearly a decade.

Late last month, speculative positions in the currency flipped from a small net short to a net long position on the Aussie dollar, indicating growing investor confidence.

Increasing Demand for the Australian Dollar

With rising rates and an expanding trade surplus, the Australian dollar continues to show strength, particularly as institutional investors like HESTA hedge their international portfolios. As the currency continues to rise, analysts predict further upward pressure due to increased demand and speculative positions in the market.