Central banks piling into Australian dollar

See the latest Australian dollar analysis here:

Macro Afternoon

From the WSJ:

Germany’s Bundesbank is expected to begin adding Australian dollar assets such as government bonds to its foreign reserve holdings before the end of September, bankers say.

The decision, which follows a two-and-a-half year review by the Bundesbank, adds to a wave of central bank demand for Australian-dollar exposures that has swelled over the last year, supporting the currency despite ongoing turmoil in the world economy, lower interest rates and a slide in commodity prices.

The Bundesbank is currently training staff and putting in place back-office infrastructure needed to begin trading in Australian-dollar denominated assets possibly within weeks, said two people at Australian banks with knowledge of the matter.

Although I still think the Australian Dollar remains a risk proxy not a safe haven, it is undeniable that the Aussie would have been lower at this stage of the business cycle in the past, as many are now waking to:

Andrew Salter, senior currency strategist at Australia and New Zealand Banking GroupLtd., ANZ.AU +1.18% said…

“We have commodities off, mining stocks down and a generally gloomy macroeconomic backdrop,” Mr. Salter said. “Capital flows are becoming increasingly important.”

We have spent the best part of the last three years talking ourselves up, as well as failing to prepare the economy for the commodities boom, so have only Canberra (and Martin Place) to blame as our most important automatic stabiliser loses traction.

The only comfort I can see in this that it looks likely that China is reaching the end of its fixed asset investment model, perhaps sometime in the next year or so, so it is probable that central banks are ringing the bell at the top.

In the mean time, Dutch Disease will continue to undermine Australia’s future.

David Llewellyn-Smith
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  1. This tends to undermine the argument that interest rates should be driven down to try to push down the $AUS.

    If the currency is higher due to high demand for the currency – whatever the reason – then directly targeting that demand might be more effective if you really feel a high currency, for a short period, could do permanent damage.

    Limiting the things foreigners can buy might be a more effective approach.

    For example

    * limit govt bond sales to locals
    * limit the purchase of existing capital assets. i.e foreigners can start businesses but not buy existing businesses
    * limit purchase of some forms of property.

    • Oh did i mention this will force us to be more reliant on domestic sources of savings. By that i mean locals who save.

  2. I thought you’d never get to it! 🙂

    Nevertheless the general reaction will be ‘whoopeeee! Everybody loves us! Aren’t we great! Let’s spend! spend! spend! ‘

    • “We have an economy that is the envy of the world … low debt … low unemployment … trend growth … budget is back to surplus … [and my favourite] and a [all sing together now] record pipeline of investment.”

      It’s all thanks to great economic management.


  3. “Capital flows are becoming increasingly important.”

    Capital flows are and have been all-important. It’s really seriously time to admit this whole ‘Dutch disease’ argument is fundamentally incorrect and go with the evidence that mining and its Australian investors are not the problem.

    • Mining doesn’t have Australian investors. Its 80% foreign owned.

      But not even that is the problem.

      It’s the commodity boom and the link to debased currencies that’s the issue, not the miners.

      It’s absurd for you argue the dollar is high for any other reason. It simply wasn’t high before…you have no evidence.

      • Just Dismal 2

        central banks and governments always had a poor record, especially when theywere proactive. Didnt they collectively sell gold at the bottom Why we should blame them is beyond me. The economy has always corrected from the mistakes, not through the foresight of some wise men. They dont exist. The dollar will remain overvalued until the damage makes it unsustainable.

        • The dollar will remain overvalued until the damage makes it unsustainable.

          What concerns me is the very real possibility that the indicator of “unsustainable” will be the smoking ruin of all of our trade exposed industries.

          It will be too late to rebuild then and we will be rooted. All of the capital intensive mining projects will be completed (or close to it) and they certainly won’t be able to take up the employment slack.

          I feel ill with worry for our country…..

          • +1.

            What is of similar concern is that, even if not left “a smoking ruin”, decimation of key *exchange-rate-exposed* industries will leave a sufficiently large percentage either bankrupt or ripe for takeover by “foreign investors”, such as those our pollies are presently inviting to make further inroads into ownership/control of our agri/food sector.

            I fear a scenario where Oz is rendered entirely beholden for its basic needs (food, energy, defence, etc) to the kindliness and non-rapaciousness of others.

          • I feel ill with worry for our country…..

            No need to worry. Our best and brightest (Parko, Gruen, Gittins, Boom Boom) have determined that Asian demand for our resources will grow exponentially ad infinitum.

            We can therefore accelerate the transition from a diverse mixed economy, to a welfare state supported by mining income.

          • Don’t worry. Skills Minister Chris Evans is there to help ya:

            Workers must retrain, low-skill jobs go

            The new Australian Workforce and Productivity Agency replaces Skills Australia

            Ok.. he just renamed a department that was started 2 years ago. i.e. more BrochureWare, as against concrete policy initiatives.

            Who does he think we are, morons?

      • “It’s the commodity boom and the link to debased currencies that’s the issue..”

        +1. Especially the latter point.

        H&H, how would one go about beginning to quantify the amount of bailout / QE monies that Primary Dealers and investment banks have funnelled into commodity speculation, esp. iron ore, copper etc, rather than simply parking back with the CB’s?

      • ‘It simply wasn’t high before…you have no evidence’
        Do you just have a closed mind?

        The dollar has been too high for as far back as I can remember and that is getting to be a long time. You don’t think a chronic ad out of control high CAD is evidence of a too high A$? You don’t think the smashing of rural Australia and the quite deliberate wrecking of its social structure had anything to do with too high a value for the A$?
        If mining was the problem we would have a CAS and so much cash we’d be running a genuine SWF. We wouldn’t be trying to fudge numbers.

        As you know I was aware long before you that the Aus mining industry was 80% foreign owned. I might be worng but I think it was i who raised the issue in these forums. I have been using that piece of evidence concerning what is wrong for about 7 or 8 years when it was a calculation of my own.

        You don’t think all the ‘hot money’ and the capital that has come here to purchase all our industry and mines has had any effect on the value of the currency?
        You don’t find it strange that trade in the currency is some 140 times that necessary to cover all imports and exports?

        • P.S. Debased currencies are an issue…but we are quite happy to accept them as payment for our resources and industries in order to maintain our lifestyles.
          So Aus has no problem with other country’s currency debasement.

        • Just Dismal 2

          Precisely. The real problem is we spend more than we earn, and that is what is destroying our industries.

  4. The Patrician

    “Although I still think the Australian Dollar remains a risk proxy not a safe haven”

    Depends on your definition of a safe haven.

    Do you consider the NOK or the CHF safe havens?

  5. If Bernanke pounds USD its all rather moot.

    Protectionism ‘beggar thy neighbour’ exacerbated the First Depression.

    Currency wars ‘beggar thy neighbour’ will exacerbate the Second.

    Australia needs to set up swap lines with the respective countries against KRW, YEN and CNY bypassing USD.