Aussie’s days as a China proxy may be numbered, warns HSBC
While many in the market are busy revising their forecast for the AUD higher, HSBC is warning that the currency is vulnerable to the rising importance of CNH, the offshore renminbi.
This week’s decision by the Reserve Bank of Australia to keep rates on hold stoked further demand for the AUD, pushing AUDUSD towards the post-float high above $1.1050 that it hit last summer. The surprise decision by the central bank came amid talk of carry-trade investors targeting the AUD after its positive start to the year on the world’s asset markets and the vast amount of liquidity pumped into the financial system by central banks in Europe, the US and Japan.
RBC, for example, revised its target for AUDUSD higher in the wake of RBA’s decision, saying it expected the currency pair to notch up to $1.1100 by the end of the fourth quarter.
Others were more aggressive, citing FX turnover data this week released by the Bank of England, the New York Fed and the Singapore FX Market Committee, which showed increasing liquidity in the AUD.
That higher liquidity should attract investors, especially reserve managers.
Figures from the Bank of England, which surveyed 30 large banks trading from London, showed AUDUSD consolidated its place in the top four most-traded currency pairs, with average daily turnover of $156 billion. The BofE survey also showed that turnover in AUDUSD grew by 2.2% over six months, while market share in EURUSD climbed 1.9% and volumes in other main currencies fell. Furthermore, in New York and Singapore, AUDUSD is now the second most-traded currency pair.
“Australia is triple-A-rated; short-term rates are 4% plus; and now the AUD is rising in the ranks in terms of liquidity,” says Chris Turner, head of FX strategy at ING. “The RBA will have a job on its hands to prevent AUDUSD from trading at $1.15 this year.”
New York FX turnover by currency pair
|Source: ING, Bank of England
But Mark Austin, strategist at HSBC, says there is now downside risk for the AUD, which has risen to a record high on a real effective basis. He says this is not just based on the currency’s extreme valuation, but also on its declining role as a proxy for Chinese growth – a key pillar of support for the currency – as the market in CNH develops.
Austin says while there has been an increase in the proportion of Australia’s exports to Asia, and China in particular, the investment rationale for holding AUD as a proxy for Asian or Chinese currencies has become weaker.
First, a number of Asian currencies have relaxed controls on their capital accounts, providing relatively liquid markets for investment. Direct access to, for example, Malaysian or South Korean bonds, is much easier now.
“Second, the need to find a proxy China currency does not really exist anymore. Investors can now
hold RMB directly in the offshore CNH market,” says Austin.
While this market is still developing, HSBC expects it to mature rapidly in 2012.
“The ongoing development of the market will see it become more liquid, offer a wider range of investment products, and offer a closer reflection of onshore exchange rates,” says Austin.
He argues that previously, to own the RMB’s closest proxy – the non-deliverable forward – investors had to pay a premium.
“Now you can hold RMB and earn a real yield on such investments too. Therefore there is little incentive to hold AUD as a proxy to Asia or China, when you can hold the real thing itself.”