Is the Aussie Dollar Becoming a Safe-Haven Currency?
Australia belongs to that exclusive club of countries with a AAA rating and its currency has been resilient, despite worries about slowing growth in its biggest trading partner, China. Now global central banks are stepping up their purchases of the Aussie dollar.
That's raising the question whether the Aussie, once one of the most volatile risk currencies, is changing colors into more of a safe haven.
Russia’s central bank has become the latest to consider wading into the nation’s assets. The country will allocate A$5 billion ($5.025 billion), or 1 percent of its foreign currency reserves, to Australian-dollar assets such as government bonds, according to a report by Dow Jones Newswires on Monday.
This follows media reports earlier this month that Germany's Bundesbank was exploring adding Australian dollar assets such as bonds, as it stepped up meetings with Australian banks to discuss its foreign-exchange strategy.
“The Aussie looks far less ugly than most other major currencies and is increasingly serving as a safe haven,” Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole in Hong Kong, told CNBC. “But I don’t think the Aussie is a safe haven in the traditional sense in the way that the Japanese yenand Swiss franc are, as Australia continues to sustain a sizeable current account deficit.”
“The liquidity of the Aussie is far lower than the U.S. dollar and the Euro , meaning that it will still only form a small but growing part of global forex reserves,” he added.
What Australia has going for it is its ability to draw strong capital inflows, both of portfolio and direct investment flows, to finance the current account, Kotecha said. The nation’s debt-to-gross-domestic-product ratio remains quite low while economic growth is relatively positive compared to other developed economies.
Australia is one of 14 countries that has an triple-A rating from Standard & Poor’s and although its central bank has cut official interest rates by 75 basis points since May to 3.5 percent and prices of commodities — the country’s largest exports — have been falling, the Aussie dollar has been resilient, trading close to parity with the U.S. dollar.
It was trading at $1.0027 against the greenback as of 3:30 p.m. in Sydney on Monday.
John Noonan, senior currency strategist with Thomson Reuters in Sydney, agrees that while the Aussie dollar has become a more attractive investment, its direction is tied to China’s economy and therein lies the big risk.
“The Aussie dollar has become a bit of a safe-haven currency and that is why it managed to hold up reasonably well when the euro zone tensions were peaking,” Noonan said. “But the Aussie dollar would become vulnerable — safe-haven or not — if the China growth story becomes clouded and hard landing fears intensify.”
Like Noonan, Sebastien Galy, senior currency strategist at Societe Generale in New York, thinks that the Australian economy relies too heavily on commodity prices and on Asia. Galy believes Australian sovereign debt is outperforming now because of the troubles in the rest of the developed economies but this may not last.
“Should these global imbalances suddenly correct rapidly, Australia would suffer and the more so as it relies heavily on Asian funding,” Galy said. “The impact on the currency depends on the degree of severity of the crisis. In average to mild scenarios, its perceived safe haven status is likely to keep the pair more elevated than it should be, likely between $0.90 and $1.08. The risk is that the scenario is more severe than is currently expected.”
—By CNBC's Jean Chua.