Gold Standard Australian Dollar

July 26, 2011

FOREX

We have talked often in this space about the idea that the Australian dollar has undergone a rerating over the past year or so and that, as such, will, indeed has, held up better than could have been expected recently given all the turmoil.

On Saturday in the Weekly Wrap, I discussed the big positive impact that interest rates, and the substantial margin over US rates, were having on the Aussie in the sense that these big margins give investors just another excuse to hold Aussie instead of some other currency.

Two Saturday’s ago I walked through the 5 drivers and showed just how positive the whole toolkit is for the Aussie at the moment when we sum up the parts.

So it is no real surprise that the discussion on the newswires and from market strategists yesterday and again today was about the Aussie’s strength. Indeed Bloomberg ran a story titled “Aussie Joining Reserve Currencies as Central Bankers Seek Commodity Havens:

Alternatives to the euro, dollar and yen are attracting traders as bailouts for Greece, Ireland and Portugal grow, U.S. leaders put the nation’s AAA credit rating at risk and Japan struggles to recover from its biggest earthquake on record. The share of global currency reserves in a category that includes Canada and Australia dollars now exceeds that held in pounds and yen, according to the International Monetary Fund.

“The desire for diversification of reserves out of U.S. dollars and euros is part of the reason for the performance of the commodity currencies,” Steven Englander, head of Group of 10 foreign-exchange strategy at Citigroup Inc. in New York, said in an interview last week. “There is a disproportionate willingness or desire to buy some of the commodity currencies now, likely because there is so much concern about the U.S. and the euro zone as well as Japan.”

It is this diversification that has driven central banks that have never before bought Aussie to start buying, it is the diversification benefits that have also opened up the market to new fund managers and traders. All in all the Aussie’s place in global trade and its stature has risen.

Indeed the Australian Foreign Exchange Committee, which is a representative forum of the Australian foreign exchange market,operating under the sponsorship of the Reserve Bank of Australia (RBA), reported yesterday that:

Average daily turnover in traditional OTC foreign exchange instruments (spot, outright forwards and foreign exchange swaps) in the Australian market was US$210.0 billion in April 2011. This was 13 per cent higher from October 2010 and over the year.

That of itself doesn’t tell us anything especially important for the Aussie, just that there has been more trading over the most recently measured 6 months. But with the AUD/USD the 4th biggest traded pair in the FX universe it suggests to me a greater level of interest which is in keeping with a bigger role in global FX markets.

The key for me is that what is happening in the Aussie is not an isolated event, perhaps its not that the Aussie is being rerated at all but that the USD, EUR and Yen are all being downgraded in importance for investors.

Certainly the Bloomberg article cited above waxes lyrical about the Kiwi, New Zealand Dollar, and Loonie, Canadian Dollar,

Statistics Canada in Ottawa said last week that net securities purchases by investors outside the country totaled C$15.4 billion ($16.1 billion) in May, the most in a year. Net inflows into the so-called loonie, named for the aquatic bird on the nation’s dollar coin, were higher last week than the past year’s average, according to Bank of New York Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration.

The amount of capital entering fixed-income markets of Canada and Australia is above average, according to Bank of America Merrill Lynch, based on an analysis of EPFR Global data. Australia was second behind Norway in the first week of July.

Investors may be turning to Australia and New Zealand’s currencies to profit from their links with China, according to Deutsche Bank AG, the world’s largest currency trader.

It’s not just China, its non-Japan Asia.

Also out yesterday was the Singaporean and Japanese versions of the AFXC cited above. What this data showed, as reported by Bloomberg (from my terminal not the web so I can’t link unfortunately) was that:

Singapore surpassed Tokyo as the busiest market for currency trading in Asia, spurred by growth in the region’s emerging markets that has led foreign-exchange traders to shift more of their top staff to the city state.

… average daily trading volumes as tracked by the Singapore Foreign Exchange Market Committee rose to $314.2 billion in April, according to a survey published today. Average volumes in Japan’s capital the same month were $277.9 billion, a survey by the Tokyo Foreign Exchange Market Committee showed.

At the same time that the Aussie and Kiwi are at or around all-time, post float, highs we also see that the Singapore Dollar, Malaysian Ringgit and Indonesian Rupiah are all also at multi-year highs against the USD. Equally the CNY is the strongest its been in more than 15 years and the Swiss Franc and Gold are both, through the roof – to put it mildly.

What’s going on?

Like the axis of economic growth, the axis of currency reserves and trading is also shifting into Asia and the economies that service it. The Aussie is benefitting, in so far as it’s risen, but it’s not alone. This fact however suggests that the “rerating” may be more enduring than many thought either probable or possible – good news for buyers of plasma screens not so good news for the rest of the economy.

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