Since the onset of the global financial crisis, the role of the Australian dollar (AUD) and its correlation to global markets have changed markedly, a trend that could continue for some time, according to the latest white paper from Tyndall.
The paper, “Weathering the Storm – the Australian Dollar in a Post-GFC World”, says that the AUD is now less positively correlated with global share market movements and commodity prices, a reversal or reduction of its historical behaviour 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 US dollar (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.”
Mr Roger Bridges, author of the paper and head of fixed income at Tyndall, says that this change has come about for several reasons, including the ongoing economic problems in the US which have led other central banks to increase their holding in currencies other than the USD.
“Other factors include the performance of the Australian economy and banking systems throughout the GFC; the ongoing demand from Asian markets for our major exports; the low Government debt; and the 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 that our currency is established as a strong alternative to those currencies that investors would traditionally turn to in turbulent times.
“Although our currency 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.
“This change of behaviour is also having effects on other domestic markets. The bond market is showing greater volatility and may be assuming the role of shock absorber to the domestic economy that the AUD used to fill in times of economic turbulence.
“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.
“Indeed, the AUD may benefit from the impetus for diversification away from currencies such as the USD, as well as the Asian growth story,” he said.
In the paper, Mr Bridges warns that the AUD will probably fall if anything upsets the world growth, such as Greece leaving the Eurozone.
“Another factor is the actions of the Reserve Bank of Australia (RBA) – as we saw in the last week or so, if the RBA is seen as likely to decrease the cash rate, the AUD becomes less attractive to global investors and as a result 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,” Mr Bridges said.
Tyndall offers Australian equities and Australian and global fixed interest funds to retail and institutional investors in Australia. It has over A$22 billion in funds under management (as at 30 September 2011).
Tyndall is a wholly owned subsidiary of Nikko Asset Management Co., Ltd., the largest regional asset manager headquartered in Asia with approximately AUD$165 billion in funds under management (as at 30 September 2011).
For more information please contact:
Roger Bridges – 02 8072 6350
12 October 2011