Australia’s currency has become a different kind of creature in the past few years, moving from being mostly a commodity play to more of a safe haven. This has been something of a double-edged sword for the country’s monetary policymakers: it helped avoid a big inflationary spike as the mining investment boom was booming; but now that wave is close to peaking, the burdens of having a premium currency are becoming harder to bear.
The Reserve Bank of Australia has been increasingly vocal about its unhappiness with the AUD in recent months, the latest board meeting minutes containing yet another observation about the high currency. But in contrast to its New Zealand counterpart, (which is admittedly in a slightly different position), the RBA is playing it straight and using mostly conventional tools — ie interest rates and the odd balance sheet tinkering — to try and cool the stubbornly high currency.
However we thought an interesting point was made in a speech today by Guy Debelle, the assistant governor for financial markets.
Debelle said there have been three issues:
1. Australian banks used to be responsible for a fair chunk of foreign capital inflows. Since the financial crisis that has changed (initially because they had difficulty accessing those markets, but increasingly now just because they don’t want to and are preferring to get more funding from deposits instead.) So the banks are now actually net repayers of their foreign borrowing.
2. Lots of foreign investors (many are now known to be central banks) are investing in Australian government bonds; foreign holdings of commonwealth government issuance has risen from abut 50 per cent in 2007 to over 70 per cent now.
3. The third one is something Debelle seems to think has been overlooked — namely that that a lot of the resources investment made in Australia by foreign companies has been funded internally, rather than through local banks or markets. So a lot of Australia’s capital inflows have been because of the direct resources investment surge:
At face value, given the share of foreign companies involved, the analysis implies that around half of the investment during the boom has been funded from offshore. However, the actual use of foreign sources of funds is much higher than that. This is because wherever companies are partly foreign owned, funding from internal sources is equivalent to partial funding from foreign sources. Consequently, since the Australian listed resources sector is around three-quarters foreign owned, the same large proportion of internal funding is attributable to foreign sources. For instance, the three-quarters foreign ownership of BHP implies that 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.
The tl;dr version is basically this chart:
In otherwords, don’t write off the AUD as a commodities proxy just yet: however it might be just a proxy for slower-moving investment rather than ephemeral commodities markets movements.
Is this just the RBA using Jedi tricks to convince the other central banks (and SWFs) that the AUD is not a one-way bet? Probably. But Jedi tricks with interesting data.
Did it work? So far, not really. The hot money at least is not listening. As for those pesky other Central Banks, who knows…
Related links:
All you ever wanted to know about the AUD and who’s holding it* - FT Alphaville
RBNZ is NOT the one – FT Alphaville