The sustained strength of the Australian dollar partly reflects international companies’ offshore funding of the nation’s resource investment boom, central bank Assistant Governor Guy Debelle said.
“The capital inflow to the resource sector to fund investment along with the increased purchases of government debt, have been putting upward pressure on the currency,” Debelle said in the text of a speech in Canberra today. “At the same time, the reduction in offshore borrowing by the banking system has been putting downward pressure on it.”
Australia’s biggest miners have favored funding from internal cash flows, rather than banks, to finance resource projects in Australia’s north and west, and inflows are boosted by foreign ownership of companies like BHP Billiton Ltd. (BHP) Debelle said three-quarters foreign ownership of BHP implies three- quarters of BHP’s internal funding is recorded as foreign.
“Taking all this together suggests that around four-fifths of the investment funding has been sourced from offshore,” said Debelle, who oversees financial markets at the Reserve Bank of Australia. “The net effect of all these flows however, is that the Australian dollar is higher than one would expect, given fundamentals such as the terms of trade and interest differentials.”
The currency traded at $1.0336 at 12:20 p.m. in Sydney, extending its longest stretch above parity with the U.S. dollar since it was freely floated in 1983. In addition to resource investment, the Aussie has been boosted by foreign purchases of Australian government debt.
The foreign ownership share of Commonwealth Government securities rose to around 70 percent from 50 percent, even as the stock of issuance has risen fivefold, Debelle said today.
The RBA cut the benchmark interest rate by 1.75 percentage points in the 14 months through December to 3 percent as the mining boom approaches a crest and the central bank seeks to help offset the drag on growth from the currency. It is seeking to rebalance a two-speed economy away from mining regions in the north and west toward industries including construction in the south and east.
Debelle didn’t address monetary policy in the speech. In minutes of its April 2 policy meeting released in Sydney today, the RBA reiterated that the inflation outlook gives it room to reduce borrowing costs to a record even as earlier cuts boost demand.
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