Has the Australian (Aussie) Dollar become the favourite currency that many global central banks will want to own?

Bloomberg News Online reported on November 25, 2013 that the Australian (Aussie) Dollar was among the most owned currencies by many central banks around the globe. The news comes as not very surprising, considering that it has relatively good fundamentals, dynamic economy, expansionary growth of the commodities, especially the mining sectors, relative stability of its banking system, political system, among others. These are the major brownie points why many central banks around the world will tend to allocate a majority of its foreign exchange reserves to the Aussie Dollar, in anticipation of robust economic growth in the country going forward. Annualised gross domestic product (GDP) growth for 2012 was at 3.67 percent, but is expected to grow at between 2.0 percent to 3.0 percent in 2014 as a result of a slowdown in global economic conditions.

According to the Nov. 24 Bloomberg report, data obtained from Westpac Banking Corp., one of the nation’s leading bond underwriter, showed that the number of central banks it interacts with has tripled to approximately 60 over for the past three years. Global central banks have bought more than a quarter of the 2033 Australian Commonwealth government bonds offered in a record sale last week. The Westpac data was dated November 20, 2013. Based on data obtained from Bloomberg News on November 25, 2013, the spot 10-year Aussie Government Bond Yield was trading at approximately 4.27 percent as of 1338 hours (Singapore/Hong Kong time) versus similar-tenor US Treasuries which yielded an average of approximately 2.76 percent. The intraday spread movements are trading upwards by approximately 4.0 bps. The yield is down by approximately 31.0 basis points (bps) on a one-month basis, and if one were to look at the simple illustration of the difference in the US Government Bond yield rate and Australian government’s interest rate spreads, there is a potential positive spread of 1.5 to 2.0 hundredths of a difference.

The Aussie Dollar has also weakened throughout the past few trading sessions, in anticipation of a further interest rate cuts by the country’s central bank,. The spot rate quoted as of November 24, 2013 during late Asian trading hours, indicated that the nation’s currently at approximately Aussie Dollar/US Dollar exchange rate of between 0.9132 – 34 to the US Dollars, or 2.0 bps spread. The Reserve Bank of Australia (RBA) has kept the cash rate well-anchored at 2.50 percent since the early to middle of this year, and RBA Governor Glenn Stevens has recently repeated his caution stance over the rapid rate of growth in the Aussie Dollar, which is not backed by relevant fundamentals in areas such as unemployment, industrial output outside the mining sectors, and the general economic slowdown in the economy. Several economists interviewed by Bloomberg News expressed their lack of consensus over whether RBA has completed its easing cycle and swaps dealers are betting that there is a probability of 75.0 percent that the current 2.50 percent benchmark rate is likely to stay anchored or move higher by the middle of 2014.  The past few low interest rate cuts have provided benefits to property buyers seeking to take advantage of the relatively low mortgage rates. Governor Stevens presided over an anniversary function, marking the thirtieth anniversary of the lifting of exchange controls last week, indicated that he and his central bank colleagues are willing to intervene in the currency markets in order to curb the excessive inflows on foreign capital into the country, and have the potential in destabilising the Australian economy.

According to the Bloomberg News Online,  the Aussie Dollar currency is likely to trend lower going forward, as most of the fundamentals impacting on the Aussie Dollar are not driven solely by the rise in domestic investment expenditures, but has been drawing some interest by many global central banks, who are seeking for sovereign yields that provide better margins, relative to the their existing portfolio of other developed economies’ bonds. However, the RBA is mindful over the eventual unwinding of the US monetary stimulus measures, which might result in global uncertainties over the potential impacts on the financial markets. Australia is particularly vulnerable given the economy’s huge exposure towards the mining/commodities sectors, and the housing markets which are susceptible to interest rate volatilities.

Despite the relative uncertainties impacting global financial markets, foreign government central banks have been looking actively on Australia government credit, and have so far expressed their favour towards the Aussie Dollar over the US Dollar, the British Pound, Euro, among others. These central banks have also looked beyond the Australian Federal Government Bonds, and some have expressed interest in owning local government bonds issued by many of the states in Australia. According to the Nov. 25 Bloomberg News report, bonds from the nation’s six states and two territories offered an average 45.0 bps more than the federal securities, according to a Bank of America (BAC) Merrill Lynch Index. It appeared that with all these central banks bond buying of the Australian Government debt, there is still room for growth in demand However, there is a question whether the trend will repeat itself going forward, given that the global economy is expected to show slow to modest growth in 2014.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc