Email of the day on the Australian Dollar
Comment of the Day

July 18 2019

Commentary by Eoin Treacy

Email of the day on the Australian Dollar

You may have seen this but thought it worth sending as it has potentially big impact for us Aussie’s.

Eoin Treacy's view

Thank you for this article which I’m sure will be of interest to subscribers. Here is a section:

Wilson, however, says that given Australia's funds have accumulated such a large stock of foreign assets, an aggregate decision of super funds to hedge their exposure will result in flows that will be twice as large as a percentage of GDP.

And it is the hedging of those exposures that is becoming a more relevant focus for market participants and policy makers

"A 10 percentage point shift in super fund hedge ratios was equivalent to a flow of 1.5 per cent of GDP in 2013. This is now 3.5 per cent."

It is therefore plausible that strengthening in the Australian dollar could trigger a "scramble to hedge" particularly among performance ranking obsessed super funds.

"A discrete increase in hedge ratios by Australian super funds now has the capacity to overwhelm the underlying outflow."

Australia, Wilson says has actually built up a "significant stock of foreign currency exposure" – well in excess of $1 trillion, or the equivalent of or 60 per cent of GDP.

That is because the banks, which borrow heavily from offshore, hedge the currency risk of virtually every dollar they raise, while super funds are prepared to take on more foreign exchange exposure.

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