Australia’s second-largest pension makes big bet on yen strength

Australia's second-largest pension fund, Australian Retirement Trust (ART), has significantly increased its exposure to the Japanese yen as the currency weakened against the US dollar. ART manages around A$370 billion (US$265 billion) of savings and has been adding to the yen trade for the past six months. Senior portfolio manager Jimmy Louca explained that markets are underpricing the potential Bank of Japan rate hikes, which makes the yen appear cheap.

This move is a rare bullish bet on the yen when many investors are looking to sell it. The currency recently reached a 40-year low, as traders anticipated slower rate hikes from the Bank of Japan amid high energy costs. Louca believes the market underestimated the likelihood of Bank of Japan rate hikes, and expects the central bank to raise rates next month, potentially signaling two hikes before energy prices further complicate its path.

ART's overweight position in the yen is part of its dynamic asset allocation program, which applies across all its diversified options. In the fund's high-growth option, the bet accounts for about half a percentage point. Louca anticipates the fair value for the dollar-yen exchange rate to be around 150, potentially reaching the high 140s.

He contrasts Japan's intervention in currency and bond markets with the US, where efforts to hold down Treasury yields clash with underlying fundamentals. ART has an underweight stance on US assets due to rising inflation, strong growth, and the AI investment boom. The fund has reduced its exposure to US Treasuries by half a percentage point, expecting further upward pressure on yields.

Louca stated that he views 30-year borrowing costs nearing a two-decade high and the latest Operation Twist as delaying, rather than preventing, further yield increases.