Robust demand for Australia's high-yielding government bonds will result in strong inflows that drive the currency 7 percent higher to parity against the U.S. dollar by year-end, analysts at Morgan Stanley said in a note published Monday.
"With gross issuance around AUD5.5 billion ($5.14 billion) a month, there's plenty of fresh debt for global investors to buy," said Morgan Stanley's Geoffrey G Kendrick.
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Yields on Australia's triple-A rated government bonds are among the highest on sovereign debt in the world. The 10-year note, for instance, yields 3.79 percent compared with 2.6 percent on 10-year U.S. Treasurys. The broad interest rate differential makes Australia particularly attractive to carry traders who borrow U.S. cash at record-low rates and invest it in higher yielding countries like Australia.
The Australian dollar hit a three-week high of $0.9357 late last week, and was trading at $0.9352 soon after open on Tuesday. It has rallied nearly 5 percent against the dollar so far this year following last year's 14.2 percent decline.
Commonwealth Bank of Australia also expects a continued Aussie rise, albeit at a slower pace. In April, it lifted its year-end forecast to $0.97 from $0.84 previously, citing economic strength and the end of the Reserve Bank of Australia's (RBA) attempts to jawbone the currency lower. It expects the Aussie to reach $0.99 by March 2015.
Late last year, RBA Governor Glenn Stevens said he would prefer to see the currency closer to 85 cents. However, his stance has since become more neutral.