The recent weakness in the resilient Australian dollar, which is down from its multi-month highs, is not due to talk of a rate cut or worries over China's patchy economic recovery. The drop is thanks to Japanese investors.
Heavy selling of Australian assets by Japanese investors, who have traditionally been big buyers of Australian bonds, has led to a fall in the Aussie, said analysts.
The Japanese pulled out A$5.9 billion ($6 billion) invested in Australian assets over November and December, the largest on record, according to data from Japan's finance ministry.
The downtrend in the yen together with a strong Aussie dollar likely pushed Japanese investors to sell their Australian assets. Plus improving sentiment for Europe late last year could have prompted the Japanese to sell assets in Australia and use that cash to buy in the euro zone instead, said analysts.
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"There was a clear shift back into European debt late last year, and Japanese investors were enthusiastic buyers," said Sean Callow, senior currency strategist at Westpac Bank.
The Australian dollar is down almost 4 percent from the four-month peak set in January near $1.06. Still, the currency, trading around $1.02 on Friday, remains above parity with the dollar and is 6.5 percent higher from its 2012 low. Analysts said the selling of Australian assets by Japanese investors has significant implications for the currency's outlook.
"Naturally, some investors make the connection between the two and have become concerned that Japanese investors will pull more funds out of Australia and cause its bonds and the currency to weaken further," analysts at Bank of America Merrill Lynch said in a research note published Thursday. "Given the high percentage of foreign ownership in the Australian bond space, such a concern is justified."
According to the note, Japanese investors held some A$178 billion worth of Australian bonds and notes at the end of 2011. Bank of America Merrill Lynch estimates that the holdings fell to A$155 billion at the end of 2012, with the bulk of the fall coming late last year coinciding with the sharp fall in the value of the yen.