(This is an excerpt from an article I originally published on Seeking Alpha on August 21, 2012. Click here to read the entire piece.)
The Reserve Bank of Australia (RBA) released the minutes of its last monetary policy decision during which it seemed to declare a soft landing for China. I took particular interest in the RBA’s assessment of the surprisingly strong Australian dollar (FXA).
The RBA pointed to the strong demand for Australian government bonds as a key support for the Australian dollar… {snip}
Just as in the U.S., government bond yields in Australia are at record lows and notably below panic lows from 2008 and 209.
Source: RBA International Market Interest Rates and Government Security Yields
The ramp up in foreign ownership in Australian bonds has been significant. On August 6th, Reuters quoted Barclays research with these data:
“Offshore holdings of the A$238 billion Australian sovereign bonds on issue have ballooned to around 83.5 percent, up from 71 percent a year ago and around a third a decade ago…”
{snip}
The RBA also pointed to the possibility that purchases from the Swiss National Bank (SNB) are further strengthening the Australian dollar although this buying may be counter-balanced somewhat by Chinese selling {snip}
On balance, the RBA demonstrates little alarm or concern for the health of the Australian economy, pointing to Europe as the key point of risk:
{snip}
Although the RBA did partially blame the high exchange rate for earlier weakness in the non-resource sector of the economy, overall, the RBA minutes do not include any strong language suggesting any urgency about bringing the currency down. {snip}
Source: FreeStockCharts.com
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on August 21, 2012. Click here to read the entire piece.)
Full disclosure: net long Australian dollar at the time of writing