March 1, 2012 / 4:20 PM / 6 years ago

Aussie heads for FX big league, aided by China ties

* 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 (Reuters) - 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 April.

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”.

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