Here’s why the Aussie dollar is refusing to fall. The interim report of the Swiss National Bank would normally not be the place to look for an explanation of why the dollar has been very strong for much of 2012. But that’s where a major part of the can be found, especially why we have soared against the euro.
It’s all to do with the SNB’s decision last September to support the value of the franc at 1.20 to the euro. To do that (and support Swiss exporters, which include big drug and manufacturing companies, as well as banks and insurers) the central bank has solid bought tens of billions of francs and bought euros.
It has to try and balance its surging reserves by selling the recently bought euros and buying other currencies such as the Australian dollar this year, especially in May and June when the eurozone again trembled. The aggressive Swiss buying of the Aussie dollar has coincided with reports of buying by other central banks and supranational organisations (such as the various development and investment banks, attracted by Australia’s high yields and especially the AAA rating.
Central banks in China, Russia and South Korea have been reported as either buying Australian dollar assets or are planning to diversify their reserves away from the US dollar and the euro. This support helps explain why the currency has held up despite the noticeable worsening in our trade performance and the drop in our terms of trade.
The Aussie dollar hit a low of just over 95 US cents in May, but this morning traded at well over $US1.05, a gain of 10.5%. The Financial Times points out the detail in the Swiss central bank’s report helps explain “some Aussie dollar stickiness” (how it is holding its value against other currencies) in recent weeks. It in particular explains how the Aussie dollar has managed to make gains against the euro, reaching a succession of new highs in the past month. The SNB has been selling euros to buy Australian dollars, plus the currencies of Denmark, Sweden, Norway , Singapore and South Korea.
The Swiss National Bank only decided last September to defend the value of the franc and try and keep it “cheap”. It set a value of 1.20 francs to the euro and started selling francs and buying euros. But in May and June the bank was forced to step up its purchases of euros and billions of dollars of worried money flowed into the country as the eurozone wobbled (yet again) and the euro fell sharply.
The half-year report shows that Switzerland has 365 billion Swiss francs (about $US374 billion or $A356 billion) worth of foreign exchange. That’s up 40% so far this year and the country now has the sixth biggest reserves in the world behind China, Japan, Saudi Arabia, Russia and Taiwan. That’s a rise of 107 billion Swiss francs, or about $A110 billion, which is a huge increase by any measure. Some of that has gone into buying the Aussie dollar.
But in defending the franc rate of 1.20, the SNB has been accumulating more euros than it can handle. As a result it has been unable to sell them fast enough. At the end of June, the proportion of its reserves held in euros has risen from 51% at the end of the first quarter to 60% by June 30. The proportion held by the US dollar has fallen from 28% to 22%, the yen is down to 8% from 9%, the UK pound is down to 3% from 5% and the Canadian dollar eased to 3% from 4%.
The report shows that the bank has invested more than 36 billion francs in other currencies ($A37 billion) since September 1 last year, with 12.4 billion of that in the June quarter, up more than 50% from the 8.05 billion bought in the March quarter. That is a significant amount of money by any measure (Australia’s foreign reserves total $A49 billion).
With buying by other so-called official sources (central banks), it’s no wonder the Aussie dollar has been able to hold its value, despite a fall in the value of our exports, the drop in the price of iron ore (our most important export, especially in the last month), the fall in the value of coal exports and the overall 10%-plus fall in our terms of trade since last September. Helping this has been the sharp fall in the amount of AAA-rated securities around the world (from $US10 trillion to $US3 trillion), which means central banks have a smaller pool of eligible currencies and assets to buy.
The Aussie dollar is now just under the level it was at the start of September last year when it traded well above $US1.05, and then fell under $US1 and climbed back over. But it is up more than 13% against the euro in the same time, from just over 75 euro cents to more than 85 euro cents. For that we can blame the buying by the Swiss National Bank in particular. That helps explain why the fall in interest rates of 1.25% since last November has had no impact on the currency’s value and why calls for the Reserve Bank to cut again next week to reduce the upward pressure on the currency, will have little or no impact.
In some respects the day-to-day value of the dollar is out of our hands. This rebalancing will continue for as long as the euro crisis continues and investors want somewhere safe to keep their money, such as Switzerland. But if the SNB can’t offload its surplus euros in a steady fashion, it might be forced to sell them more quickly, a move that would drive the euro lower and inject a surge of volatility into currencies like the Aussie dollar.
While this is now old news – it’s nice to see that it’s finally being reported in Crikey.
For a start the RBA Chairman could stop giving speeches that telegraph in big letters that there is zero political risk that the Australian government and it’s agencies will do anything about a currency speculation bubble driven by foreign governments and their various agencies.
Wayne could stop listening to the Boss and fly over to Switzerland and suggest that his counterpart have a little word to Stevens’ own counterpart find somewhere else to park all those spare francs and euros for a while. You guys broke the global economy so fix it yourself and stop breaking our economy.
The Government through the Treasury could meet with the RBA and revise the current agreement that puts the focus on inflation and ignores the currency – even though that’s the other central role of the RBA to oversee along with the price of money.
From there we have a range of options. Print money on a dollar to franc basis and directly retaliate against a recalcitrant Swiss central bank that doesn’t takes it marbles and play elsewhere. That would get the Swiss government’s attention and make it a World Bank and IMF issue – not to mention a G20 finance minister’s issue.
The RBA could slash rates to .25 % and instruct the banks to operate to a LVR of 75% or lower until further notice.
The government could release 250-500 billion in new 30-50 year bonds that could be used for infrastructure building on a massive scale – built by a surge in new migration from Europe and America – explaining to the public that we either grow or suffocate down the mines.
But I guess a bunch of baby boomers masquerading as leadership material and their aging cheer squad of two dollar economic commentators will simply throw their hands up the in the air and say – “I like my French wine cheap – and oh so love those holidays skiing at St Moritz and Whistler – and let’s not forget the Bogans jetting off to Bali and buying their 10th flat screen TV – they’ve never had it so good.
Meanwhile there goes 30 years of painful economic adjustment in the wake of tariff reforms down the dunny. And let’s not forget – at the end of the day we’ll all be dead soon enough.
So the “central bank has solid bought tens of billions of francs and bought euros”. If it’s bought Francs and Euros how does this in any way affect their relative values? Surely buying both means they stay at the same level?
The quote was mashed.
I interpret it as “The central bank has sold tens of billions of (Swiss) francs and bought euros.”