* Aussie dollar transactions jump, central bank surveys show
* Investors attracted by Asia links, strong economy
* Analysts expect this to keep the currency strong
By Jessica Mortimer
LONDON, March 1 The Australian dollar is
emerging as an attractive investment alternative to major global
currencies such as the dollar and euro, with its links to growth
in China and Asia boosting its share of foreign exchange trade.
Central bank surveys show the volume of Australian dollar
trade has jumped, reflecting its popularity in sovereign foreign
exchange reserves and among long-term investors as debt concerns
tarnish the reputations of the world's most traded currencies.
Australia's relatively high interest rates, currently 4.25
percent, also make it attractive to shorter-term investors as a
'carry trade', where money is borrowed in low-yielding
currencies to invest in higher-yielding assets.
But the surveys do not show a similar rise in other
attractive but less traded currencies, such as the Canadian
dollar and Norwegian crown. It is the Aussie dollar's links to
Asia - where there are limited opportunities for investment as
many currencies are pegged - which may be its greatest appeal.
"The attractiveness of the Australian dollar has notably
increased in recent years," said James Pearson, global head of
FX spot trading at Royal Bank of Scotland.
"It is triple-A-rated, has strong fundamentals, relatively
high carry, has links to commodities and to China and Asia, when
most of these economies remain capital controlled and therefore
offer limited access to international investors."
Australian dollar transactions jumped to 4.75
percent of UK average daily turnover in October from 3.45
percent in April, Bank of England data showed, taking it closer
to the major currency league made up of the U.S. dollar, the
euro, then yen and sterling. Its rise came mainly at the expense
of the yen and sterling.
The data is significant because London is the biggest centre
for FX trading, making up around 37 percent of global turnover,
according to the Bank for International Settlements. Surveys
from the United States, which makes up around 18 percent of
turnover, and Singapore, with around 5 percent, showed similar
substantial rises in Australian dollar volume.
"Volume trends move very slowly, so this is not a flash in
the pan ... It looks like the Australian dollar has definitely
got a promotion to the major leagues in terms of reserve
currencies," said ING currency strategist Chris Turner.
The Australian dollar is "growing as a financial asset in an
environment of huge concerns over the dollar, euro, yen and
sterling". This means it could well stay at what many consider
to be overvalued levels for some time to come, he said.
MORE TRADE BOOSTS APPEAL
Increased trading makes an asset more "liquid". This lessens
the degree to which a single large order can cause sudden,
sizeable movements because there are more likely to be other
market players looking for better levels to buy or sell it.
"Ten years ago, the Australian dollar was mainly traded by
corporates and commodity producers, whereas now the Aussie along
with the Canadian dollar and the Norwegian crown is certainly
approached as an asset to be considered in a diversification
portfolio," said Audrey Childe-Freeman, currency strategist at
JP Morgan Private Bank.
Within six weeks of the collapse of Lehman Brothers in
September 2008, the Australian dollar lost almost 30 percent of
its value against the U.S. dollar. But deeper liquidity
may make such moves less likely in future.
"If you've got a lot more liquidity in the market then the
likelihood and size of any 'gapping' in the market is likely to
be minimised. Which makes it easier to 'run for the door'," said
Christian Lawrence, currency strategist at Rabobank, referring
to the gaps on price charts that can be left by big moves.
However, its use as a riskier carry trade could mean
day-to-day volatility stayed relatively high, he said.
Aussie dollar trading is concentrated outside Australia.
Data from the Reserve Bank of Australia (RBA) showed Australian
dollar transactions little changed in October compared with
An estimated 75 percent of Australian government bonds are
held offshore. RBA Assistant Governor Guy Debelle said recently
the euro zone crisis encouraged this influx of foreign money,
which was contibuting to Aussie strength.
"Offshore trading of the Australian dollar has exploded,"
said Greg Anderson at Citi. He believes the Aussie may be taking
over from the yen as the favoured way of investing in growth in
China and Asia, perhaps because dollar/yen has been
confined to a fairly tight range in recent years.
"The question is once dollar/yen starts to move again, will
volume go back to dollar/yen? I suspect it won't, but we will
have to observe this for a longer period to see whether this is
a permanent shift".