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cover story 1 Appreciating the Aussie The sky-high valuation of the is raising questions about elements of the fair-value model and a potentially explosive carry trade. While developments in the US support a strong Aussie dollar, fiscal and monetary policy shifts within the Asia Pacific region could have a bipolar effect on the currency going forward.

B y k i m b erley gaskin

he terms of the debate on the Australian Some, like Roland Randall, senior strategist at TD Securities dollar have been rewritten several times over (TD) in , believe trading has broken away from the the past year. For the first six months of balance of elements – including the gold price, yield spreads, 2010 FX market participants were discussing commodity prices and global investor risk appetite sentiment whether the currency would breach parity. – that support the fair-value model. The currency is now After it thrust through that barrier, the aggressively pricing in far more short-term factors. “It can’t argument shifted to just how false that be denied that the Australian dollar is way out of line with fair Tsupposed ceiling may have been. value and even long-term trend values,” says Randall. With the Aussie hitting a 29-year high of US$1.10 in May The consensus is that the market has been distorted by (see graph on this page), market participants are still pondering an excessive influence exerted by just two factors: the anti-US that question. Comments Sally Auld, interest rate strategist dollar trade expressed through the gold price, and the carry at J.P.Morgan in Sydney: “Six months ago investors did not believe the Australian dollar would go much above US$1.02, Australian dollar versus US dollar, and yen nor were they positioned for the kind of run we have seen.” Now a bifurcated investor base is emerging. Part of the 250 1.20 buying community remains bullish and predicts levels of Euro per A$ (RHS) US$1.15 and greater, while part is beginning to retreat as fears of overvaluation rise. “Trying to assess where fair value is on 200 1.00 US$ per A$

any instrument is very difficult because the playing ground (RHS) USD, globally has shifted so profoundly,” notes Auld. “Right now 150 0.80 Eu yen

no-one really knows if the Australian dollar at A$1.10 is 10 per ro cent overvalued or 10 per cent undervalued.” A critical issue is whether the traditional fair-value model is broken, being reinterpreted or simply whether both long- and 100 0.60 short-term buyers are over-emphasising certain elements of the YEN per A$ model. Most currency strategists believed the Aussie dollar to be (lHS) somewhat overvalued at levels of around US$1.06 in mid-May 50 0.40 this year, but always including the caveat that understanding 1986 1991 1996 2001 2006 2011 where the currency will move is less predictable than ever. SOURCE: THOMSON REUTERS, WM/REUTERS MAY 4 2011

28|kanganews j u n e 2 0 1 1 “Structural forces will again depreciate the US dollar in 2012-13. The long-run implications for the Australian dollar are bullish because it is also undergoing its own structural appreciation.”

Richard Grace Commonwealth Bank of trade spurred by yield differentials. With the Reserve Bank of investor confidence,” says Robert Rennie, chief currency Australia (RBA) unlikely to intervene (see box on p30) there strategist at Westpac Institutional Bank (Westpac) in Sydney. could be ramifications if and when perceptions alter. How the Fed handles the end of QE2 is paramount to the performance of the US dollar. And there is little faith that the One eye on the US process will be handled well based on the past performance S dollar weakness is universally accepted as the key of the Fed, although some argue that the predicted fiscal stimulus to the strength of the Aussie dollar, based on Armageddon will be a non-event. “QE2 is the next Y2K,” U international currency reserve diversification, strong quips TD’s Randall. real money demand for Aussie dollars against US dollars and, On the other hand, there is also general agreement that particularly, gold prices. “With the US Federal Reserve’s second while a cyclical recovery should follow QE2, structural decline round of quantitative easing [QE2] in November 2010, the is on the cards on the back of an acceleration in the US net price of gold has played a greater role in fair-value models of international equity and foreign direct investment surplus, sharp AUD/USD,” notes John Kyriakopoulos, Sydney-based senior rises in net foreign debt, the widening of the current account currency strategist at National Australia Bank (NAB). deficit, the move from international currency reserve managers Kyriakopoulos argues that it is the gold price – which to diversify out of US dollars, and low interest rates. “Structural captures perceptions of debasing the US dollar through printing forces will again depreciate the US dollar in 2012-13,” claims more money and repurchasing US Treasuries under the Richard Grace, Sydney-based chief currency strategist at QE2 programme – that explains the Australian dollar’s lofty Commonwealth Bank of Australia. “The long-run implications level against its US equivalent. “Over the last six months the for the Australian dollar are bullish because it is also undergoing correlation of daily changes in AUD/USD has been of similar its own structural appreciation.” magnitude with both a yield differential and the gold price. In While the US story seems unlikely to improve any time the previous six-month period the Aussie dollar’s correlation soon, with the consequent upwards pressure on the Australian with the price of gold was around 60 per cent of the correlation currency, moves afoot across the Asia Pacific region to deal with a yield differential,” he explains. with inflation – and increased decoupling from US monetary Emphasis on the weakness of the US dollar increased over policy in the Asia Pacific – mean the extremely strong recent April and May, with the US facing both monetary and fiscal real-money bid for Australian dollar assets may moderate as policy paralysis (see feature on p35). Federal Reserve chairman yields increase across the region. Ben Bernanke reaffirmed that QE2 will be completed even though the US economy has reached exit velocity – meaning The other eye on yield interest rates are unlikely to be increased for another 18 months he US dollar narrative is not the only influence on the according to most commentators. This has created upwards Australian currency, though. “It’s been an important pressure on the Australian dollar because investors understand T driver, given that the US dollar index has fallen to that even following tightening it will take another six to 12 a 33-month low, but it clearly doesn’t tell the whole story months for risk assets to start to be affected. about the Australian dollar’s appreciation,” says NAB’s Meanwhile, the drama being enacted by Congress coupled Kyriakopoulos. The rest of the story of valuation is around with the inaction of the Fed is significantly affecting investor yield differentials. While commodity prices and Australia’s confidence. “Treasury secretary Tim Geithner is using the link to China are key underpinning forces, it is the unusual debt ceiling as a political football – imagine what that does to combination of two elements of fair value being so heavily

“There has been a scaling back in the role of speculative investors versus real-money investors as a driver of the Australian dollar in recent years. There is certainly less leverage available to the speculative community.”

John Kyriakopoulos National Australia Bank

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The intervention effect Capital controls – or a lack thereof – have emerged as a major influence on currency movements in the last 12 months. FX strategists do not believe the Reserve Bank of Australia (RBA) will abandon its policy of non-intervention, despite exporters’ pleas and the interventionist actions of other central banks.

Central banks have emerged valuation of the currency. To manage currency risk, a Australian currency specialists as the core driver behind the Macquarie’s fingerprints number of Asian and other are largely not in favour of profound changes in currency were certainly all over the central banks have intervened intervention, mainly because valuation. Diversification clarion call to the RBA for to contain capital inflows – of the vexed issue of where fair programmes and carry trades discussion, with the bank’s providing fuel for domestic value actually lies. Even AIG’s have changed the trajectory senior economist, Brian Australian commentators who Ridout acknowledged in the of key currencies, but central Redican, publishing a note in favour intervention. radio interview the difficulty banks are also exerting major May arguing it is hard to justify in determining fair value: “We influence either through direct a valuation beyond parity and South Korea has re-imposed don’t even know whether it is intervention or by default. pointing to recent indications a 14 per cent withholding tax overshooting,” she admitted. of possible intervention from on foreign investors’ earnings To some extent it can be the central banks of from government bonds and David Bloom, head of foreign argued that, all exogenous and . announced a macro-prudential exchange strategy at HSBC, pressure aside, the Australian stability levy on non-deposit believes there is almost dollar has appreciated Notes Alexander Philipatos, foreign currency liabilities of no chance the RBA would because the RBA has allowed policy analyst at the Centre financial institutions. intervene to manufacture it to. While acknowledging for Independent Studies: has mandated that foreign depreciation, or cap an in a number of publications “Essentially they are urging investors can hold no more appreciation. “Indeed, the that the exchange rate is the RBA to abandon its prime than 30 per cent of their exchange rate is the Australian “very high”, the RBA remains responsibility of price stability investments in Taiwan in economy’s guardian angel as focused on its primary and start intervening in the government bonds, while the it has kept inflation within the objective – containing foreign exchange markets Indonesian has RBA’s target,” he comments. inflation, which a high-value because local exporters limited rupiah deposits held by currency assists with – and is are doing it tough in the US foreigners. showing no real signs of giving market. Just because the Changes in US dollar in to pressure to intervene. US Federal Reserve has In Latin America the Central against selected abandoned price stability Bank of has undertaken currencies That pressure is considerable. doesn’t mean the RBA should more direct measures, Change May 2010 to In May some key industry too.” unveiling plans to buy US$12 May 2011 (%) participants agitated for more billion of foreign exchange -15 “informed discussion” about Offshore policies over 2011 to relieve pressure Chinese -5 the level of the currency Pressure from the actions on the peso, which since the -9 – essentially a tarted-up of other central banks – announcement of that policy GBP -8 request for intervention. particularly those within has depreciated by 3 per cent -7 Indian rupee 0 the Asia Pacific region or from its January high. -7 Heather Ridout, chief with similarly-appreciating -11 executive officer of the commodity-based currencies Meanwhile, the Central Bank -5 Australian Industry Group – is also a consideration.The of Brazil used the futures Australian dollar -15 (AIG) – a peak body RBA’s peers are looking to market to ease exchange Euro -12 representing Australian contain historic highs against rate pressures, introducing a Source: Bloomberg, Board businesses – opined that the the US dollar using macro- reserve requirement on short of Governors of the Federal Reserve System May 2011 high level of the Australian prudential capital controls. US dollar positions. dollar was wreaking havoc on competitiveness and called According to data from the for the RBA to lead a more RBA, the Malaysian ringgit, “There is almost no chance robust two-way discussion new Taiwan dollar and Thai about the currency. “What baht have all reached 13-year the RBA would intervene to I’m actually advocating is that highs in the last year, while the manufacture depreciation, or we have a more informed Singapore dollar has reached cap an appreciation. Indeed, the discussion around the options a record high (see table on that we need to put in place this page). The , exchange rate is the Australian to deal with this thing, or the the and South economy’s guardian angel as actions we need to take,” she African rand have hit two-year it has kept inflation within the said on ABC radio, quoting peaks, while the Canadian Macquarie Bank (Macquarie) dollar hovered around record RBA’s target.” research on the over- high levels in January. David Bloom HSBC

30|kanganews j u n e 2 0 1 1 emphasised at the same time – US dollar “Tim Geithner is using the debt weakness and yields – that is driving the valuation skywards. ceiling as a political football Over the past year, the AUD/USD – imagine what that does to rate has increased by 20 per cent while the investor confidence.” trade-weighted value of the Aussie dollar has also risen by 8 per cent “If it was Robert Rennie Westpac institutional bank just a weak US dollar story – that is, the Australian dollar didn’t appreciate against other currencies – the the country’s foreign exchange reserves exceeded a trade-weighted value would have appreciated by just 2 per cent. reasonable level and that diversification of the holdings should Instead, the AUD has risen sharply against the CAD, GBP, be improved. The central bank may use China’s sovereign NZD, KRW, INR, CNY and SGD,” notes Kyriakopoulos. wealth fund – China Investment Corporation – to help the Spreads between 10-year Australian government bonds and diversification process, although how the Chinese will address US Treasuries illustrate the point – they are currently sitting at this inflationary issue is still largely unknown. Given Australia’s around 180 basis points. “That’s a vote on current and expected close ties to China it is not unreasonable to expect further yields on those bonds,” notes J.P.Morgan’s Auld. investment in AUD-denominated assets from the Chinese Data on currency reserves tells the same story about a yield central bank. Even a marginal shift in allocation towards the and diversification driver. The International Monetary Fund Australian dollar could have a major impact on its valuation. (IMF)’s currency composition of official foreign exchange reserves (COFER) data reveals that the share of US dollars held Carrying the can in reserve by global central banks had fallen to 56 per cent in t the same time as strategic allocations to Australian Q4 2010 – the most recent available data – from 72 per cent dollars have been growing, there also appears to have in 2002. Reserves in ‘other’ currencies – which include the Abeen a counterbalancing reduction in the volume of Australian dollar – had grown to 3.3 per cent in Q4 2010 from short-term, speculative money in the FX market. 1.15 per cent in 2002. The growth of short-term buyers over the last five years It appears that a diversification trade has emerged from had for some time been exerting more and more collective central banks and a carry trade from other real money investors. pressure on currencies. The Australian dollar was very much at “Prior to the financial crisis most people saw the carry trade their mercy in 2010 when the net long position in the currency working in the speculative market, but it has shifted to the real- based on CME Group futures contracts hit A$7.5 billion money market now,” argues Auld. “And given this money is (US$7.9 billion) in April and was cut to just A$700 million by much stickier, we expect it to persist for longer than usual.” early June. At the same time the Australian dollar plummeted to On April 13 a survey was released by Central Bank US$0.81 from US$0.93. Publications, based on responses from 39 reserve managers There seems little doubt that speculative currency trading has responsible for reserves totalling US$3.5 trillion equivalent or shifted in response to regulation. In July 2010 the Dodd-Frank’s an estimated 35 per cent of the global total. The survey found ‘Volcker rule’ effectively outlawed proprietary trading by banks 20 per cent of respondents held more than 5 per cent of their after the transition date of 2013. Throughout 2010 and 2011 reserves in Australian and Canadian dollars and Scandinavian US investment banks began closing down their prop trading currencies, while more than 25 per cent had increased their desks, and some market watchers have noted a distinct lack of exposure to these currencies in the past two years. speculative money in the foreign currency market as a result. “I do see potential for the central bank buying base for Comments Kyriakopoulos: “There has been a scaling back the Australian dollar to grow in coming years. Australia’s solid in the role of speculative investors versus real-money investors economic performance, high interest rates, shrinking current as a driver of the Australian dollar in recent years. There is account deficit, low public debt and triple-A credit rating certainly less leverage available to the speculative community.” suggest the currency will find its way into more central banks’ While a genuine reduction in speculation could reduce reserves,” comments NAB’s Kyriakopoulos. the traditionally high volatility of the Australian dollar, no-one There is also considerable speculation “Asian currencies are undervalued and about how the deployment of China’s US$3 trillion those that are pegged tightly to the US equivalent reserves may dollar are effectively importing very change allocations going loose US monetary policy, which is now forward. In April China’s central bank governor, turning up as an inflation problem.” Zhou Xiaochuan, stated Sally Auld J.P.Morgan

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Japanese retail shifts Australian dollar product focus Japanese retail demand – formerly a driver behind the Australian dollar – is undergoing a structural shift to a new product base, as well as navigating the shorter-term implications of the country’s recent natural disasters.

While central bank demand According to NAB data, just moved on from Japanese retail has largely migrated to the for Australian dollars remains A$3.5 billion of Uridashi being a key or swing driver investment trust – or Toshin strong, retail is a harder maturities are due in 2011, of the Australian dollar. That – market (see p33 for more market to analyse at this the lowest annual total since demand will remain slow for detail). “This product is more stage – particularly in a 2004. While market watchers some time, but it will return in flexible and more short-term Japanese context. “The last were convinced this would some measure.” in its positioning in AUD/JPY,” few years have not seen net translate into a positive notes Darren Boulos, head of issuance of Australian dollar- net issuance year in 2011, While Uridashi volumes have foreign exchange at Deutsche denominated Uridashi bonds, the natural disasters have been affected, the decline is Bank. “Consequently, the so that market has not been interrupted the momentum of less important than it would Japanese retail investor as significant a driver of the the market. have been three or four has become a more high- Australian dollar’s rise,” says years ago. Over this period frequency currency trader John Kyriakopoulos, senior “Interest in AUD/JPY by Japanese retail demand for through these products rather currency strategist at National Japanese retail investors AUD-denominated product than Uridashi bonds.” Australia Bank (NAB). has halved since the earthquake struck on March Toshin asset allocation by currency (%) In 2009 net AUD-Uridashi 11 and produced a climb in issuance was negative A$3.23 yen volatility,” comments billion (US$3.42 billion) Kyriakopoulos. In April Other 8.5 and in 2010 it was negative approximately A$500 million sek 1.4 NZD 1.5 A$2.4 billion. In 2011 to the was issued, a big drop from the Nok 1.7 beginning of April the market A$1.6 billion issued in March hkd 3.2 usd 35.5 experienced four months prior to the natural disasters. gbp 3.4 of positive net issuance of cad 4.4 Australian dollar denominated The drop off in activity brl 10.3 Uridashi bonds – the first certainly demonstrates positive issuance level since that the Australian dollar

the first half of 2005. This appreciation was not tied to eur 12.2 aud 17.9 reflected increased post- this demand centre, says crisis demand and, most Robert Rennie, chief currency importantly, a sharp fall in strategist at Westpac Banking maturities. Corporation. “We have clearly Source: Nomura Securities March 2011

believes this will be a long-term structural demand shift, with Trading Commission released on April 15 showed International the prop traders evicted from US banks widely expected to Monetary Market currency speculators are holding their largest appear at hedge funds around the world and likely to increase net position in Australian dollars. In the last week of March their buying over time. there was a massive 65.4 per cent increase in the position, Other short-term buyers are also emerging, most notably indicating that the speculative trade is alive and kicking – and managed trading accounts. “Leveraged names are not as potentially poised to wreak havoc again. prominent in the Australian dollar market or other G10 Certainly there is concern that an explosion of carry trading currencies – they have shifted focus to the dollar-Asia market,” following G7 central bank intervention to sell the yen after the comments Darren Boulos, Sydney-based head of foreign natural disasters in Japan has been most significant in pushing exchange at Deutsche Bank. “But we are seeing commodity the Australian dollar not just beyond fair value but also outside trading adviser accounts – which are trend-following accounts the boundaries of the fair-value model itself. Some believe the – go long commodities and therefore on the Australian dollar dangerous weight applied to the yield input into fair value may in recent months.” end up being destructive to value over the longer term. However, these buyers – which are generally algorithmic, Comments David Bloom, head of foreign exchange strategy black-box investors – are notoriously volatile and the consensus at HSBC in London: “The intervention changed the dynamic view of currency strategists is that a carry trade is fuelling of the FX market. With USD/JPY downside now apparently the Australian dollar. Figures from the Commodity Futures protected by the central banks, investors feel more comfortable

32|kanganews j u n e 2 0 1 1 in selling JPY to buy higher-yielding currencies. As the “It can’t be denied that highest-yielding G10 currency the AUD has been a major beneficiary of the rapid return to carry trading.” the Australian dollar is The data tells the story eloquently. Since the G7 way out of line with fair intervention on March 18, total return for traders value and even long-term buying the three highest-yielding G10 currencies – the Australian dollar, and Norwegian trend values.” kroner – and selling the three lowest – yen, Swiss francs Roland Randall TD Securities and US dollars – has been around 10 per cent according to HSBC data (see chart on this page). approximately US$50 billion, a figure large enough to hit Bloom argues there is danger in the current trading pattern: exchange rates. “Carry trades can rapidly unwind if market perceptions change But by all accounts the expected repatriation of capital to and months of accumulated returns can be wiped out in a very Japan has not really occurred on the anticipated scale, given short space of time.” the earthquake-affected region does not have major exposure He concedes that buyers cite the undoubtedly strong to foreign currency investment trusts, according to Nomura. fundamentals behind the Australian dollar to justify the trade, Intervention to weaken the yen on the part of the G7 controlled but he remains wary that the resurgence of yen-funded carry any change in appetite for AUD/JPY cross product. “This trades makes the Australian dollar particularly vulnerable given created demand for the cross – investors were looking to buy evidence of the record long speculative position. “Should into any weakness in that cross,” notes Deutsche Bank’s Boulos. Japanese investors begin to repatriate funds for reconstruction Westpac’s Rennie believes the repatriation story was vastly on a scale sufficient to see the yen strengthen, it is not clear how overblown. “Ironically, the only real source of repatriation soon G7 central banks would intervene again. And some of was Japanese retail liquidating its short yen positions in the the recently-instituted long Australian dollar positions could be immediate aftermath of the disaster,” he says. Outflows are rapidly unwound,” he comments. expected to slow as a function of elevated risk aversion in The spectre of Japanese capital repatriation has been Japan, but there is unlikely to be sufficient repatriation to really hanging over international capital markets since the March hit either the yen or the Aussie dollar. catastrophe, with the Australian dollar market far from immune given shifts in Japanese retail appetite for the currency (see box Asia Pacific developments on opposite page). According to data from Nomura Securities s the US loses its grip on currency reserves and its own (Nomura), of the US$302 billion equivalent held in the preferred fiscal and monetary policy, there is a growing view investment trust product, Toshin, 17.9 per cent of holdings are in Athat the regional backdrop will become ever more Australian dollars – the second-largest absolute holding, but the important to the AUD – and that investor perception of Asian largest relative to GDP (see chart on opposite page). currencies and the Aussie dollar may be shifting considerably. “The size of current positions in Toshin means that In the year to March 2011, for example, Asian currencies – repatriation does have the potential to move the FX market,” as measure in the Asian FX Index – remained robust in spite of explains Jens Nordvig, global head of G10 FX strategy at significant outflows from emerging market (EM) funds. “Some Nomura in New York. Repatriation of 10 per cent of these interpret this as showing that EM currencies have finally come assets in a short space of time would generate inflows of of age and are no longer seen as a weak link during global risk events,” says Bloom. The fact G10 carry trade total return that the AUD has strengthened 111 during the same period may also mean that investors are starting 109 to challenge the accepted wisdom 107 that it is a risk-on currency. 105 “We are seeing a fundamental ex

d regional shift,” comments

in 103 J.P.Morgan’s Auld. “Asian 101 currencies are undervalued and 99 those that are pegged tightly to the US dollar are effectively 97 importing very loose US monetary 95 policy, which is now turning up Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 as an inflation problem – they are Source: HSBC April 2011 reacting strongly to that.”

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The emerging Dim Sum bond market and Asian exposures One upwards driver of the Australian dollar in recent times has been demand for product denominated in the currency as a means for global investors to gain exposure to emerging Asia. If China’s capital market grows and internationalises, the need for a proxy may ease, however.

Ongoing liberalisation across Fund (IMF)’s special drawing “The bond market Given the perfect storm of Asia will inevitably affect rights (SDR) at a G20 meeting developments are particularly circumstances developing the Australian dollar over that was heavily focused on significant,” David Bloom, over China’s capital markets time, notes Sydney-based global currency issues. head of foreign exchange and its approach to monetary Deutsche Bank currency strategy at HSBC, tells policy, the possibility of even strategist, John Horner. “A The IMF board has advised KangaNews. “The People’s greater interest in Dim Sum broad range of Australian against the inclusion on the Bank of China will continue to bonds must be considered. dollar crosses against Asian grounds that it is premature. work on ways to allow foreign currencies – including “The recent review of the institutional investors to invest Three supranationals have Singapore dollar, Malaysian SDRs’ valuation concluded in the interbank bond market.” already tiptoed into the Dim ringgit and Korean won – are that in spite of China’s Bloom believes the central Sum market, all of which at 15-year highs given our prominent share of global bank will respond positively are frequent issuers in the positive beta relationship. But exports, the yuan should not to requests by foreign Kangaroo bond market. In we are now at very stretched be included in the SDR basket central banks to hold RMB- January World Bank issued its levels,” he says. as it did not meet the criteria denominated assets as part of first renminbi-denominated to be determined a freely their reserves. “This suggests transaction – a CNH500 The high beta will reach a usable currency,” the IMF said RMB internationalisation is million two-year deal, which natural limit. “A key part of in a report. also associated with some included the first swap ever that will be the liberalisation gradual relaxation of capital done in the currency. of financial markets across Nonetheless, there is an controls,” he says. Asia, particularly China. In the expectation that a slow and International Finance next few years more people steady liberalisation of the While there could be a Corporation and Asian will play the Asian market renminbi will occur, alongside complementary strengthening Development Bank have more directly rather than via a similarly-measured effect on the AUD from an also issued deals of CNH150 the Australian dollar,” says currency appreciation. appreciation of the renminbi, million and CNH1.2 billion, Horner. an issue the Australian bond respectively. In March the Chinese market may have to grapple Support for the government rolled out with could well be competition Heike Reichelt, head of internationalisation of the renminbi trade settlement for supply from a burgeoning investor relations and new renminbi – which is an to all companies in China, Dim Sum bond market. In products at World Bank in explicit goal of the Chinese expanded outward and 2011 CNH40.4 billion (US$6.1 Washington, says the potential government– is gathering. inward direct investment in billion) of CNH-denominated of the market is significant – the currency, teased onshore bonds had been issued by the but it will take time to develop. In November 2010 France’s bond markets – via Hong beginning of May, according “It won’t rival a non-core president, Nicholas Sarkozy, Kong – into life, and expanded to data from HSBC. This is market like the AUD yet,” proposed its inclusion in the currency swap agreements to already a big jump on the full- she notes, “but demand is basket of reference currencies enable cross-border renminbi year 2010 volume of CNH35.6 growing as the currency for the International Monetary trade. billion. internationalises.”

Despite some capital control intervention to put downward What this means is that Australia is rapidly becoming part of pressure on currencies and inflation, Asian central banks a region with attractively high yields and economies that are both are also striding rapidly towards monetary policy that is growing and becoming more open. This may translate into some non-synchronous with the US, which will have far-reaching pull back in the use of the AUD as a proxy for Asian exposure implications for the Australian dollar in the coming decade. – particularly to China, where there are signs of a developing Monetary policy tightening is the key trend across the bond market that could in time suck up some of the demand for region, with Singapore raising rates three times this year to AUD-denominated product (see box above). 0.7 per cent, raising rates to 6.75 per cent in May, The flip side is that an appreciating renminbi is likely to raising rates to 3 per cent in April and India raising act as a stimulant to the Australian dollar given the greater rates nine times in the last 12 months to 7.25 per cent. The purchasing power this will deliver to the Chinese. Says Grace main focus remains on China, which has raised rates twice this at CBA: “This will provide very significant support to the year to 6.31 per cent. Australian dollar going forward.” •

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