The world’s mangiest AAA rating

From Fairfax:

ANZ currency strategist Daniel Been notes the currency has performed better during this cycle than in past downturns, as global investors chose to ignore many of the economy’s broader vulnerabilities.

“One of the puzzles of this cycle has been the persistence of AUD strength and the AUD’s ability to outperform against a number of other global betas to which it has traditionally been correlated, eg Asian equity market performance,” Been says in a note to clients.

“This may have been driven by a heightened focus on sovereign ratings,” he says. “This change has driven a shift in perceptions about the safety of the AUD as a haven currency, where the quality of the sovereign (rather than the broader economic construct) came into focus.”

But he reckons that it’s a temporary phenomenon, making the Aussie vulnerable for a further downturn.

“Our view is that a currency that has a positive current account position, a lower external financial burden, less cyclicality, and a lower total debt burden should be considered a more appropriate safe haven than one which simply has a AAA rating attached to its government debt.

“As such, rather than waiting for it to manifest we recommend selling AUD against the Norwegian krona – a far cheaper AAA commodity currency, where fundamentals appear to be more structurally resilient.

When that’s going to happen is anyone’s guess, Been concedes.

The following chart shows that the Aussie is a far riskier currency if measured by other factors than the AAA rating.

It’s not a problem we’ll have to worry about for much longer.