See the latest Australian dollar analysis here:
Economically speaking, Australians are very fortunate people. We are also some of the most ignorant. These truisms are played out superbly in the least understood yet most important feature of Australian markets.
What’s the best asset hedge in the world? This, via BNP
Our analysis has two stages: a historical assessment of the most reliable G10 FX risk-off hedge complemented by a forward-looking approach to determine how sensitivities will evolve given current account dynamics and Net International Investment Positions (NIIIP). We analyse historical weekly G10 FX returns during periods of significant declines in the S&P500 to determine the best risk-off hedge in G10 FX. The data are adjusted for outliers, which we define as anything above or below 1.75 standard deviations from the mean return observation for any given FX pair. Figure1 shows average weekly returns during periods of declines of at least 15% in the S&P500 using data since 2000. We capture seven such declines with an average move lower in the S&P of 24% per period, resulting in 31 observations. AUDUSD most sensitive pair to risk-off. The output suggests AUDUSD is the most sensitive pair with a mean weekly decline of 1.5% during periods of large equity market sell-offs. As Figure 2 highlights, the distribution of returns shows wider left-handside tails for AUDUSD and NZDUSD than the rest of the commodity bloc.
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This hedge applies not just to stock. But property and other local assets as well. The speed and depth of AUD sell-offs protects all assets from internal devaluation via the external crash.
Sadly, many Australians see the currency as too volatile and scary, which is actually its strength. The AUD is the best asset hedge in the world and you are mad if you do not utilise it to the full by having large slices of wealth in offshore markets.