Australia, the new Switzerland?

January 5, 2012


I have been away for a while and have many things I want to talk about as we enter a new possibly tumultuous year. So this post is a question and a catalyst for future blogs on this and related topics over the next week or so as I prepare to get back into the swing of things.

As I write though the Australian Dollar is having its time in the sun once again with a fresh all time high against the EUR this week of 0.7955 which is well above the 200 week moving average of just 0.6478 and way above the range top for the past year of 0.7735.

I’ll have a look at the prospects for the AUD/EUR cross in the next few days as I’m wondering if this is not something akin to the massive break in the Australian Dollar v British Pound rate a few years back.

For the moment however I wanted to focus on the demand for Australian Government bonds by foreigners. Yesterday morning I tweeted Byron Weins 10 predictions for 2012 from Business Insider. One of the predictions is that,

Investors go long on currencies of prudent governments

With the image of an Australian $100 note.
Now some here in Australia may quibble a little with the policies of the current Government and the Opposition party would certainly seek to highlight the increase in borrowings that have occurred over the past few years.
But there is no arguing that Australia is still currently in reasonable  “relative” economic health and that by the metrics of modern-day Sovereign analysis the nation is in fine fettle.
Indeed the interest rate on offer on Australian Government debt compared to what you get as an offshore investor relative to yields available in your home or other jurisdiction starkly highlight that on a risk adjusted basis Australia is in the top-tier of AAA rated nations in the Sovereign sweep stakes. 
Indeed the catalyst for this post was a question asked of me by a colleague on whether the spread between the 2 year OIS in Australia and the Australian Government Bond rate, which is at its widest in a year told me anything about a potential move in OIS.
Which got me thinking, is Australia the new Switzerland?
Sure there are other contenders as Byron Wein points out, Singapore and Scandinavia amongst them. But there is something different about the Australian Dollar over the past year or so, it doesn’t crash anywhere near as much as it used to. Equally we know that the percentage of Australian government bonds held overseas is at an all time high as well and now the Australian Dollar Euro rate is equally buoyant.
I’ve never bought and still don’t, the argument that the Australian Dollar is now a safe haven. Sure its been re-rated though with more central bankers and investors than ever holding it and Australian assets. But if the Swiss national Bank doesn’t want Switzerland to be Switzerland than perhaps Australia has no choice.
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  1. Industry Founders as Australian Dollar heads higher | Lighthouse Securities - January 24, 2012

    […] are bunkum. I tend to agree more with Professor Roubini than Mr Kohler but as I wrote back on January 5th the Aussie Dollar maybe just doesn’t have a choice except to appreciate given that, if the […]

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