At any other time in our history this would have meant a corresponding drop in the Australian Dollar.
Not this time.
This week the RBA has considered the level of the Australian dollar. RBA Governor Glenn Stevens said yesterday that the exchange rate has remained high "despite the observed decline in the terms of trade and the weaker global outlook". This is a significant shift.
Today's Financial Review reports that the "tech giants" being Apple, Google and Microsoft together have stored significant holdings of short term Australian treasury bills from their cash reserves. This follow's Monday's Reuters report that Shell has announced it is shifting $15 billion of its cash reserves out of European banks into US treasuries and US bank accounts "to avoid growing macroeconomic risk" in the words of Shell's CFO.
It is argued that upward pressure on the Australian Dollar has been supported by acquisition of Aussie dollars by foreign central banks (from Germany, Kazakhstan, Russia, the Czech Republic, Switzerland, Qatar, Kuwait and Abu Dhabi) looking for a AAA government bond paying a good yield.
Why would US companies be doing this? In the past, the US companies mostly sent their Australian profits to the US, where some of their reserves are held in US treasury bonds. But very low yields on US treasuries and the weakness of the US dollar led them to invest in Australian debt instead.
Last week in the Financial Times, Neil Hume reported that there were a number of reasons posited for the current strength in the Australian dollar. They can be summarised as:
- The Safe Haven - or diversification away from US$ and also from Euro exposure, (particularly the latter according to Gerard Minack from Morgan Stanley)
- Australia's AAA rating
- Good GDP numbers
- Relatively high interest rates (3.5%)
Last week RBA Governor Glenn Stevens gave a speech entitled "The Lucky Country".
Stevens spoke about the Australian dollar in connection with China. He said if there were a serious slump in China, the Australian currency would “probably” fall, providing a much-needed boost to the domestic economy but he also noted in the case of a Eurozone break-up that another financial crisis might result in a larger flow of funds into Australian denominated assets:
“In that case our problem might be not being able to absorb that capital”
Australians will be watching closely. WIll our currency remain a "commodity currency" or is the current decoupling a permanent shift?
Stevens spoke about the Australian dollar in connection with China. He said if there were a serious slump in China, the Australian currency would “probably” fall, providing a much-needed boost to the domestic economy but he also noted in the case of a Eurozone break-up that another financial crisis might result in a larger flow of funds into Australian denominated assets:
“In that case our problem might be not being able to absorb that capital”
Australians will be watching closely. WIll our currency remain a "commodity currency" or is the current decoupling a permanent shift?
