This represents a reversal or reduction of its historical behaviour in times of crisis and is a trend which we believe could prevail.
In fact, with countries previously viewed as safe havens experiencing extreme turmoil, it could be said that Australia and its currency are now being viewed as a new port of call in times of crisis.
The global financial crisis (GFC) may have proved to be a turning point for the Australian economy and the way the AUD trades in future.
In the decades leading up to the GFC, and indeed during the height of the crisis itself, the AUD always fell against the USD in times of adversity.
However, during the crises experienced since 2009 – most notably the European sovereign debt woes and US’s weakening economy and credit rating downgrade – the AUD has held up remarkably well compared with its historical performance and with proportionately less volatility, despite falling at times.
We believe this change has come about for several reasons: ongoing economic problems in the US, which have led other central banks to increase their holdings in non-USD currencies; the strong performance of the Australian economy and banking systems throughout the GFC; ongoing demand from Asian markets for Australia’s major exports; low Government debt; and ratings downgrades of various countries such as the US.
The long term impact of these on the performance of the AUD is still unclear, but it could mean the AUD is established as a strong alternative to those currencies that investors would traditionally turn to in turbulent times.
Although the AUD has fallen during the most recent crisis, it has not slid to anywhere near the level one would expect given its historical behaviour in such an environment.
Indeed, the AUD may benefit from the impetus for diversification away from currencies such as the USD, as well as the Asian growth story.
However, it is possible the AUD will fall if anything upsets global growth, such as Greece leaving the Eurozone. Additionally, if the Reserve Bank of Australia (RBA) is seen as likely to decrease the cash rate, the AUD becomes less attractive to global investors; as has been witnessed following recent actions by the RBA, the AUD has fallen slightly against the USD.
Furthermore, in this new scenario we can’t underestimate the role that a weaker USD is having. If the current crisis deepens, affects Asia or even becomes Asia-centric, then the USD may resume its role as ‘the’ safe haven currency and the AUD may fall back into its old pattern.
With economic problems around the globe, analysing the effects of financial turbulence on markets may increasingly become a question of “which crisis is the most serious right now?” – the answer to this question and its effect on the USD will determine the behaviour of the AUD.
Roger Bridges is head of fixed income at Tyndall Investments (a Nikko AM group company).
