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Bundesbank Considers Buying Australian Dollars
June 13, 2012


By James Glynn


Germany's Bundesbank is considering adding Australian dollar assets such as bonds to its foreign currency holdings in a move that would reaffirm Australia's emerging status as a safe haven for investors amid growing disquiet in Europe, bankers say.

Officials from Germany's central bank have stepped up meetings in recent months with major Australian banks to discuss the possible change in foreign currency strategy, said two people with knowledge of the meetings, who both declined to be named due to commercial confidentiality.

The German institution's interest in the Australian dollar has grown "very serious", said one of the people directly involved in the meetings with Bundesbank officials.

A Bundesbank spokesman declined to comment.

One of the most cautious central banks in the world in terms of its foreign asset allocations, the Bundesbank has since 2010 discreetly been reviewing whether to add Australian dollar assets to its portfolio and has held preliminary discussions on investing in the currency with officials from the Reserve Bank of Australia, the Pacific nation's own central bank. The Reserve Bank of Australia, or RBA, prepared a briefing document for the Bundesbank in 2010 that detailed the nature of Australia's debt markets and the economy, said a former Australian central bank official with knowledge of the study.

A spokeswoman for the RBA in Sydney declined to comment.

The heightened interest in Australian dollar assets comes amid a rush by global investors for new safe havens that has already pushed Australian bond yields to record lows. Investors are worried that Europe's debt crisis could trigger a global recession.

The German central bank's currency reserves comprise largely of U.S. and Japanese government bonds, as well as money market instruments and the bonds of supra-national entities. At the end of 2011, the Bundesbank held foreign currency reserves worth 29.433 billion euro (US$36.8 billion). Of these, 93.1% were U.S. dollar assets, 6.8% were Yen and the rest were denominated in other currencies.

Amid continued uncertainty over the future of the euro, central banks around the world are running out of safe options in terms of low-risk foreign assets. That has pushed some towards the Australian dollar and helped to keep the currency close to parity with the greenback despite concerns over China's demand for the nation's resources. Russian officials recently stated that the country had added Australian dollar assets to its central bank portfolio.

Entry of the Bundesbank would open up a lucrative new client for Australia's big four banks that dominate the local currency market. Local banks are already vying for the business to manage Bundesbank trades in the currency despite the German central bank not being fully decided on whether to enter the market, said the people.

The Australian dollar is now the seventh most traded currency in the world and the fourth ranked trade with the U.S, greenback, according to the Australian Foreign Exchange Committee.

"There is definitely interest from Europe in buying Aussie," said Su-Lin Ong, chief economist at RBC Capital Markets.

Australia's dollar is trading around parity with the U.S. greenback after reaching a record of US$1.1080 in May last year.

The strength of the currency is a reflection of Australia's robust economy now growing at an annual rate of 4.3%. Australia is benefiting from Asia's demand for its natural resources and one of the lowest rates of unemployment amongst developed nations. Along with low levels of government debt the country benefits from a top investment grade sovereign rating.

But the interest of the Bundesbank in the Australian dollar could add to the problems facing Reserve Bank of Australia Governor Glenn Stevens who along with the government faces ongoing criticism for not doing enough to ease the impact that the exchange rate is having on areas of the economy that don't directly benefit from mining. The RBA has aggressively cut rates since November to a level of 3.25% but that has so far done little to dampen the market's appetite for the Australian dollar.

"While I'm very conscious a number of sectors are struggling with the exchange rate where it is, we shouldn't wish too quickly for a low exchange rate," said Mr Stevens in a speech on Wednesday.

Tom Fairless in Frankfurt contributed to this article.