An interesting quote from the AFR this afternoon is worth repeating:
For the Australian dollar, the threat from emerging markets softness can be traced back to significant reserve holdings that might be tapped for sale.
“Big picture, you still have a pretty clear correlation between the Aussie and Asian central bank reserves, excluding China,” Westpac currency strategist Sean Callow said. “There is still great sensitivity to turmoil in emerging markets, for one thing it cuts off a potential supply of Aussie demand through central bank reserve accumulation and potentially, it could cause them to cut Aussie holdings.”
Indonesia and some Latin American economies have taken to selling portions of their foreign exchange reserves to resuscitate their own ailing currencies.
“To the extent that any of these had been buyers of Aussie over recent years, then at the very least they’re not buying any more because they don’t have the extra money to put to work,” Mr Callow said.
First we should note that any volume of sales is likely to be small because the capital flight is focused on current account deficit countries which do not, for the most part, hold large reserves of foreign assets. After all, they’ve no reserves to hold.
Nonetheless, central banks will hold reserves and over the past few years we have seen reports that those of Brazil, Russia, Germany, Hong Kong, South Korea, Poland, Sweden, and Switzerland. Among the eight possible holders are Iceland, Indonesia, Jordan, Malaysia and Singapore.
Unfortunately the latest IMF Currency Composition of Official Foreign Exchange Reserves (COFER) data we have is from the first quarter of this year (and we only have two quarters given this listing is new). It showed emerging markets holding US$51.2 billion, up from 48.4 billion in the previous quarter. Advanced economies held US$47.4 billion up from $41,303.
Certainly this is enough to have some impact but the data is too old now to tell us much given the selling really began in April/May. The next round will be interesting.
Bottom line, there are a few likely holders of the currency that have experienced recent weakness but the only ones with current account deficits have been Brazil and Indonesia. Others like Russia and Malaysia have experienced currency weakness but not enough to worry them at this point.
Another point to mention is that none of the countries are any more operating a US dollar peg so there is no need to defend the currency and deplete their assets.
Indeed, the roughly 10% devaluation this year that has transpired in Malaysia and Russia will no doubt be welcomed as a boost to competitiveness.
Unfortunately the Australian dollar is unlikely to benefit unless these flows get more serious.
