The RBA has had interest rates on hold for an extended period and the recent appreciation of the Australian dollar will put some pressure on the RBA to further cut interest rates. The fall in our currency from around $1.10 US dollars to down in the sixty cents range helps our exporters and aids the post mining boom rebalancing of the economy to other sectors like manufacturing.
The recent rebound in the Australian dollar towards 80 US cents has hurt our exporters. If the RBA was to lower interest rates, parking cash in Australian dollars becomes relatively less attractive for foreigners and the reduced demand can cause it to move downwards.
The fear of January drove investors to flee equities and seek out safe havens like Australian Government Bonds. This meant Australian bonds did well over January and into February. The turning of sentiment into March has seen some of this mini rally in bonds come off and the asset class had a small negative return over the month. However, bond investors have still seen a solid positive return over the year to date.
International bonds have had a stellar first quarter this year. The heightened volatility in markets has reminded investors of the importance of bonds as effective portfolio diversifiers. High quality government bonds will tend to appreciate in price when stocks are falling.
Later in the quarter, central banks provided some impetus for bonds to rally. The European Central Bank and Bank of Japan made additional commitments to their bond buying programs. The US Federal Reserve indicated that there would be less interest rate rises this year than previously predicted. Prices of bonds move in the opposite direction to yields. Consequently, bond investors enjoyed a capital gain as yields ground ever lower.
Australian shares bounced back hard in March. Those sectors that had been punished the most in January benefited the most in the subsequent whipsaw rally. For example, the S&P/ASX Metals and Mining sub index lost 10% in January then put on 11% in February and 7% in March to end the quarter up a net 6%. More defensive sectors, such as healthcare, didn’t do as well. The Healthcare sub index ended the quarter in the red, losing 2%.
Those markets and sectors beaten up the most in January and the first half of February have rallied the hardest. For example, Chinese companies listed in Hong Kong fell 15% in January alone. In March they rallied 14%. The Australian dollar has appreciated over the quarter and so currency hedged international shares have outperformed unhedged.