The Reserve Bank of Australia said the country’s currency is held by as many as 34 central banks from Reykjavik to Santiago, and models suggested the Aussie dollar was as much as 15 percent overvalued, documents showed.
The central banks of Slovakia and Slovenia were recent additions in a list of 16 economies that publicly hold the Australian currency, according to papers prepared in the second half of 2012 and released today under a Freedom of Information Act request by Bloomberg News. Newcomers on a list of 18 possible holders included China, France, India, South Korea, Thailand and South Africa.
“Most models -- including the staff’s internal models and the IMF’s models suggest the exchange rate is overvalued by 4-15 percent,” a document for the RBA’s September board meeting showed. The so-called Aussie was at $1.0277 at 4:32 p.m. in Sydney, having traded between $1.0167 and $1.0625 in September. While the models suggested the currency was overvalued, it wasn’t “substantially so,” the document showed.
Australia’s economy is struggling under the sustained strength of the nation’s currency, which has remained above parity with the U.S. dollar for eight months, the longest stretch since it was freely floated in 1983. The RBA cut interest rates by 1.75 percentage points in the past 16 months and has said it takes the exchange rate into account when setting monetary policy.
‘Somewhat Too High’
Governor Glenn Stevens said last week the currency is “somewhat too high” considering declines in prices for the nation’s commodity exports, while adding he would need to be confident it is “seriously overvalued” before considering intervention to weaken the exchange rate.
“The RBA is on the edge of a policy dilemma with respect to the currency,” said Matthew Johnson, a Sydney-based interest-rate strategist at UBS AG. “Substantial further strength, say a move above $1.10, would require further rate cuts, but there is a limit to how far one ought to push such a policy, as it may create financial stability issues a little further down the track.”
Demand from abroad for Australian government bonds helped drive yields on all the securities to record lows last June. Benchmark 10-year rates touched 2.698 percent June 4 after foreign holdings of federal securities reached as high as 82.3 percent in the third quarter of 2011. The rate was little changed today at 3.35 percent.
Traders see about a 75 percent chance the central bank will lower its 3 percent benchmark rate to a record 2.75 percent by June, swaps data compiled by Bloomberg show.
The RBA predicted below trend 2013 growth on Feb. 8. It lowered its estimate to about 2.5 percent, from about 2.75 percent forecast in November, citing weak investment outside the mining industry and a stronger-than-expected currency.
Along with the New Zealand, Canadian, Swedish and other currencies, the Aussie has strengthened since 2008 as nations such as the U.S., Japan and the U.K. reduced rates to near-zero and carried out quantitative easing to boost their economies.
“Australia has been one beneficiary of the global portfolio reallocation to highly rated assets resulting from the increased relative riskiness of holding euro-denominated assets,” the September document showed. “Canada and a number of Scandinavian countries, as well as Switzerland, have seen similar flows.”
The Swiss central bank has pledged to stop its currency strengthening beyond 1.20 francs per euro.
The SNB’s foreign-currency reserves surged 86 percent in 12 months to 427 billion francs ($460 billion) at the end of January as policy makers stepped up euro purchases to curb flows sparked by the region’s debt crisis. The reserves reached a record 429 billion francs in September.
“While the extreme circumstances facing Switzerland last year presented a clear and credible case for intervention, the circumstances in Australia cannot yet be considered comparable,” the RBA documents showed. “There is not strong evidence that the Australian dollar is posing an imminent threat of deflation or is highly contractionary for the domestic economy.”
Slovakia and Slovenia’s central banks were added to a list of 15 Australian currency holders that was created in July by the RBA and released in September under an earlier FOI request by Bloomberg News. Germany’s classification was moved from definite to possible.
An e-mail among the documents, in which the sender’s name was redacted, said researchers have been unable to uncover official announcements from Middle Eastern countries on their holdings of Australian dollars.
“However, based on their relatively large holdings of FX reserves and the media reports below, we would classify U.A.E., Saudi Arabia, Qatar and Kuwait as countries possibly holding AUD,” it said. “The composition of Iran’s FX reserves, on the other hand, would most likely be classified as ‘unknown.’”
The central banks confirmed or possibly holding the Australian dollar manage as much as $7 trillion between them in their reserves, according to data compiled by Bloomberg. They have benefited from including the Australian dollar as the South Pacific nation’s bonds delivered this year’s only returns among top-rated sovereign debt.
Azerbaijan’s State Oil Fund, known as Sofaz, started investing in Australian dollars last year as the third-biggest oil producer in the former Soviet Union diversified reserves. The fund had $34.1 billion of assets as of Jan. 1, according to Sofaz’s website.
“The demand for Australian government bonds is part of the reason the Aussie dollar is strong,” said Johnson at UBS. “Inflation risk is a very large factor in the portfolio allocations of bond investors, including central banks, that choose to take exposure to currency moves. Australia, with low debt and conventional monetary policy, has very low inflation risk.”
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