Aussie: reserve managers’ new favourite

August 10, 2012

Lucky Australia. In a world of slowing economic growth its central bank today raised forecasts for 2012 GDP growth by a half point to 3.5 percent. That’s down to a mining boom, driven of course by China. But there’s a downside. Australia’s currency, the dollar (or affectionately, the Aussie), has steadily risen in recent years, and is up 3 percent versus the U.S. dollar this year. Unsurprisingly, the Reserve Bank of Australia tempered its good news on growth with a warning over the Aussie’s gains.

Analysts at Credit Agricole note that the Aussie’s gains this year have come in tandem with a rise in Japan’s yen. That in itself would have been highly unusual in the past: the yen is a so-called safe haven, the currency investors run to when all else is selling off, while the Aussie is a commodity currency, one that does well when world growth is looking good and risk appetite is high. CA analysts explain thus:

The role of the (Aussie) is probably changing from a traditional commodity currency to an increasingly attractive reserve currency.

There is only anecdotal evidence central banks are actually buying the Aussie in large quantities. The German, Swiss and Russian central banks are among those that have indicated an interest. But a recent IMF report put the share of ‘other’ currencies (that includes the Aussie and the New Zealand dollar) in world FX reserves at $295 billion in the second 2012 quarter.  And that’s quite a jump from $87 billion in three years ago. The graphic below shows that the share of the “others” in central bank reserves now exceeds the sterling or the yen.

Credit Agricole adds:

Although the breakdown is unknown, such a big jump indicates at least part of diversification flows moving into Aussie.

Some of the Aussie’s gains are down to foreigners’ enthusiasm for its bonds. Australia is one of only seven countries to bear the gold-plated seal of an AAA rating from all three main agencies.  According to ING, almost 80 percent of Australian government bonds are now held by foreigners, compared to 50 percent in 2009. That jump has partly to do with the zero or negative yields offered by traditional safe-haven bets such as Treasuries or Bunds. ING writes:

Although long-term Australian bond yields (ie, 10-year) are at their lowest for at least 60 years (near 3 percent), on a relative G10 basis, they offer an exceptional nominal return. This has not gone unnoticed by investors, particularly foreign buyers.

The Aussie slipped today against the dollar after the central bank’s warning. But the subdued mood, analysts agree, is unlikely to last and could push the central bank into cutting interest rates to weaken the currency.

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The Aussie should give you today a fake sense of safety. You must remember that (as I mentioned many times on my investing blog that the investment managers are actually investing for a very short term (1-3 months) and we are actually at the end of Q3. It is also a period with very stable commodity prices, so everything is relative here…

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