UniSuper, one of Australia’s largest superannuation funds, has stepped up hedging on its overseas investments, saying it expects the Australian dollar to appreciate as the interest rate differential between Australia and the United States shifts in favour of the local currency.
The fund, which manages A$166 billion in assets (about $116.8 billion), told Reuters it had "tweaked" its approach to currency hedging after concluding the Aussie is trading below where it should be. On Friday the Australian dollar was quoted at $0.7056, down from this month’s three-year high of $0.71465 but substantially above the November trough of $0.6422 that marked the start of its ascent.
John Pearce, UniSuper’s chief investment officer, said he was surprised the currency took so long to reach 70 U.S. cents. "I’ve been surprised that it’s taken the Aussie so long to get to 70 cents to be honest," he said. Pearce pointed to strong commodity prices and improved terms of trade as reasons the currency should be trading higher, while noting that interest rate dynamics had pressured the currency earlier.
"It’s really been the interest rate differential that’s been keeping it lower. And now that’s getting in the Aussie’s favour, I think you’re going to see upward pressure," Pearce added.
The local currency gained more than 1 percent earlier this month after the Reserve Bank of Australia raised the cash rate by 25 basis points to 3.85 percent. Financial market pricing continues to imply at least one more RBA rate increase this year. By contrast, the U.S. Federal Reserve held its benchmark rate steady in January in a 3.50 percent to 3.75 percent range, and traders are pricing in roughly two rate cuts over the coming year according to the CME Group’s FedWatch Tool.
Pearce said the shift in rate expectations has changed the economics of hedging for Australian investors. "We’re actually now getting paid to hedge," he said. "When Aussie rates were below U.S. rates, it was costing money. Now there’s a carry, that’s one positive."
The stronger Aussie over recent months has led a number of large Australian pension funds to raise hedging on their international exposures to limit U.S. dollar risk. Two of the country’s largest funds, Australian Retirement Trust and HESTA, have also increased hedging of overseas investments in recent months.
Pearce dismissed concerns that larger allocations to hedge back into Australian dollars by pension funds would meaningfully drive the currency up. He said he did not see a scenario in which the scale of these portfolio adjustments would create a problem, adding that the foreign exchange market is very large.
For reference, the article noted the exchange rate of $1 equaling 1.4215 Australian dollars at the time of reporting.
Context and implications
UniSuper’s move reflects a broader reassessment by major institutional investors in Australia of currency exposure, driven by a convergence of central bank policy differentials and commodity-driven terms of trade. The fund’s decision to increase hedging and its comments on carry economics illustrate how evolving rate expectations can alter the cost-benefit analysis of currency protection for large portfolios.