Bloomberg News

RBA Says Up to 23 Countries Hold Australian Dollar Reserves

September 17, 2012

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The Reserve Bank of Australia said the country’s currency is held by as many as 23 national central banks from Brasilia to Moscow whose purchases have helped sustain the Aussie dollar’s gains, internal documents showed.

The central banks of Brazil, Russia, Germany, Hong Kong, South Korea, Poland, Sweden, and Switzerland are among 15 that hold the Australian currency, according to a spreadsheet created in July and other papers released today under a Freedom of Information Act request by Bloomberg News. Among eight possible holders are Iceland, Indonesia, Jordan, Malaysia and Singapore, they showed.

The Aussie is up 3.2 percent this year against the U.S. dollar even as the nation’s No. 1 export customer, China, sees a deepening slowdown and as falling prices for iron ore and coking coal erode the nation’s terms of trade -- a measure of windfall gains from exports that reached a 140-year high last year. RBA Governor Glenn Stevens last month called the currency’s level “a bit on the high side.”

“The apparent preference shift and resulting portfolio shift of foreign investors towards Australian dollar government securities has increased Australian dollar demand,” Chris Potter of the RBA’s international department wrote in an April 5 document that was among those released today. “The increase in demand associated with this shift appears large by historical standards.”

Record Lows

Demand from abroad for Australian government bonds helped drive yields on all the securities to record lows in June. Benchmark 10-year rates touched 2.698 percent June 1 after foreign holdings of federal securities reached a record 76.5 percent in the first quarter of 2012.

“There is reason to believe, and theory that agrees, that non-resident purchases of Commonwealth Government Securities have supported the Australian dollar,” Potter wrote. “This increased demand for Australian dollar assets has been associated with a shift in investor preference to increasing exposures to Australian dollar assets, probably associated with a reappraisal of the relative risks of such investments.”

The central bank included notes that referred to Potter as a junior officer and said his paper was a draft that shouldn’t be seen as representing the RBA’s views. Even so, in parliamentary testimony Aug. 24, Stevens echoed Potter’s assessment.

‘High Quality’

“There is more tendency now for some official flows seeking the high quality assets,” he said. “I’d have to say that it’s most likely that the official investors, they’re not usually the most adventurous, they’re usually the ones that come along after others have been coming for a while, so I think all those things are at work.”

The European Central Bank and Bank of England don’t have the currency in their reserves and the U.S. Federal Reserve recorded an “apparently not” under the column on whether it keeps the Australian dollar, the RBA spreadsheet showed. As to the central bank of China the document recorded “???” on whether it held the Aussie.

The net inflow of capital to Australia increased to 4.5 percent of gross domestic product in the first quarter, which “in net terms was directed entirely to the public sector,” the documents showed.

Dollar’s Strength

The local dollar’s strength has propelled it to the widest divergence in more than a decade from Australia’s terms of trade, and also left it out of step with a drop in government bond yields.

“The RBA’s repeated reference to the disparity between the fall in the terms of trade in the first half and the elevated level of the Australian dollar does suggest some concern,” said Callum Henderson, Singapore-based global head of currency research at Standard Chartered Plc. “The fact that so many central banks have added the Aussie to their FX reserves may go a long way to explaining this disparity from a flow perspective.”

Among the documents was a May 21 private parliamentary briefing titled “Recent Developments in the Australian Dollar” that was almost entirely redacted. The one paragraph remaining said: “The high level of the Australian dollar continues to be supported by the still high level of the terms of trade. Strong foreign demand for CGS has also been a supporting factor for some time.”

AAA Rating

Overseas investors seeking a haven for their funds have directed them at the highest rating countries. Australia, Canada, Denmark, Norway, Singapore, Sweden and Switzerland are the only nations with stable AAA scores from all three main ratings companies.

The increased demand for Australian government debt may have helped drive down the perceived risk of holding the currency because investors such as central banks are less likely to suddenly sell their assets, Potter wrote. Such buyers also wouldn’t be seeking to hedge their investments, increasing the impact of their purchases on demand for Australian dollars, he wrote.

Even after the RBA reduced its key interest-rate by 1.25 percentage points since November to 3.5 percent, it retains the highest benchmark borrowing cost among major developed nations. Policy rates are near zero in the U.S. and Japan, 1 percent in the euro area and Canada, and a record- low 2.5 percent in neighboring New Zealand.

Traders are pricing in a 51 percent chance that the central bank will cut borrowing costs by another 50 basis points by year end to 3 percent, matching the 50-year low the benchmark reached at the height of the global financial crisis.

To contact the reporter on this story: Michael Heath in Sydney at

To contact the editor responsible for this story: Stephanie Phang at

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