Surf’s up, Aussie bulls!
In fact, the Aussie has been flexing its muscles even before EZ officials like Nowotny, Draghi, and Merkel made optimistic comments that boosted higher-yielding currencies. AUD/USD is now comfortably above the 1.0500 handle, while EUR/AUD is trading at new all-time lows.
So what’s prompting market players to buy the Aussie like there’s no tomorrow? Here are three possible explanations.
1. Australia’s growth prospects leave its counterparts eating dust.
The Australian economy is one of the brightest stars now, thanks to a boom in the mining sector (pun intended) and strong demand for raw materials in Asia. In fact, the Land Down Under clocked in one of the fastest GDP growth in the developed world during the first quarter this year!
And then there’s also the country’s AAA credit rating. With AAA-rated economies in the euro region threatened by the debt crisis, Australia’s government bonds present a pretty good deal for market players who want a diversified portfolio.
2. China’s got Australia’s back!
As I wrote earlier this month, China has fired up its stimulus efforts to stoke economic growth. Recent reports also say that local governments have announced investment projects amounting to 130 billion USD to counter the economic slowdown.
How does that affect Australia, you ask?
China is Australia’s largest trading partner. And so, stronger economic growth for China is good news for Australia too as it implies that there would be stronger Chinese demand for Australian products.
3. Central banks are diversifying into Australian-denominated assets.
You read that right! Monetary authorities as well as hotshot playas on Wall Street are buying up Australian assets.
Foreign-owned Australian bonds have jumped from 57% in 2006 to 84% in June 2012. In fact, the IMF has already ranked the Australian dollar as the third most widely held foreign currency reserve!
The Wall Street journal has estimated that about 60 central banks are diversifying into the Aussie with around 30 of them just starting recently. Among those is the SNB. Swiss central bankers have reportedly started buying the comdoll nine months ago when the U.S. dollar started to trade lower.
Germany’s central bank has also jumped on the AUD bandwagon! Market junkies say that it will start buying Australian government bonds to add to its foreign reserve holdings before the end of September.
Sure, all this is well and good for the Aussie. However, too much of a good thing also has its consequences. The RBA may soon find itself in the BOJ’s and the SNB’s shoes when the Aussie’s strength starts to weigh on exports and the overall economy.
So if the ECB or U.S. NFP report fail to impress investors and give them more reason to seek the Aussie for its growing safe haven appeal, don’t be surprised to hear talks about the RBA acting towards taming the Aussie’s strength.