UniSuper Says Australian Dollar Undervalued, Boosts Currency Hedging

Post by : Saif

One of Australia’s largest pension funds, UniSuper, says the Australian dollar is undervalued and could rise in the coming months. Because of this view, the fund has increased hedging on its overseas investments to protect against currency changes.

UniSuper manages about A$166 billion in assets. Its Chief Investment Officer, John Pearce, said the fund recently adjusted its strategy because it believes the local currency should be trading higher than it is now.

On Friday, the Australian dollar was trading near $0.7056. Earlier this month, it reached a three-year high of about $0.71465. Back in November, it had fallen to around $0.6422 before starting its recent climb.

Pearce explained that strong commodity prices usually support the Australian dollar. Australia exports large amounts of iron ore, coal, and other raw materials. When global demand for these goods is strong, the country’s currency often gains strength. He said he was surprised it had taken so long for the dollar to return to the 70-cent level.

Another key factor is the difference in interest rates between Australia and the United States. When interest rates are higher in one country, investors may move money there to earn better returns. Recently, the Reserve Bank of Australia raised its cash rate to 3.85%. Financial markets expect at least one more increase this year.

At the same time, the Federal Reserve in the United States kept its benchmark rate steady between 3.50% and 3.75% in January. Traders believe the U.S. central bank could cut rates later this year. If Australian rates stay higher than U.S. rates, this difference could support the Australian dollar.

Currency hedging is a strategy used by investors to reduce the risk of losses from exchange rate changes. Many Australian pension funds invest heavily in U.S. stocks. In the past, they often left these investments unhedged because the U.S. dollar is seen as a safe haven during global uncertainty.

However, when Australian interest rates were lower than U.S. rates, hedging could be costly. Now, according to Pearce, the situation has changed. He said the fund is effectively “getting paid to hedge” because of the interest rate gap. This makes the strategy more attractive.

Other large pension funds, including Australian Retirement Trust and HESTA, have also increased their currency hedging in recent months. This shows a broader shift among Australian superannuation funds.

Some analysts worry that if large funds move more money into Australian dollars, it could push the currency up too quickly. Pearce dismissed those concerns. He said the size of global currency markets is much larger than any single pension fund’s actions.

For everyday Australians, these moves may seem distant. But pension funds manage retirement savings for millions of workers. Their decisions affect long-term returns and financial security. By adjusting their hedging strategies, funds aim to protect savings from sudden currency swings.

The debate over the Australian dollar’s true value reflects wider economic changes. Strong commodity exports, shifting interest rates, and global market trends all play a role. As central banks continue to adjust their policies, currency markets are likely to remain active.

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