bb6945a8-8132-11e2-a376-1e7653010d54_RBA-document

7/29/2019 bb6945a8-8132-11e2-a376-1e7653010d54_RBA-document

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Central Bank Holdings of Australian Dollars

According to recent media reports, an increasing number of central banks have added

Australian dollars (AUD) to their foreign currency reserves. This note draws on publiclyavailable information (including central bank Annual Reports) and anecdotal evidence to

identify which central banks (and affiliated finance ministries) hold AUD. Timely, reliable

information is quite difficult to come by, and central bank reports generally do not provide

information on the currency composition of their reserves. Nevertheless, our best guess is that

of the 71 central banks surveyed, 16 currently hold AUD, 18 possibly hold AUD and 21 do not.

We were unable to uncover sufficient information to gauge whether any of the remaining 16

central banks in our sample hold AUD.

Of the 71 central banks investigated in this note, the following was ascertained regarding AUD

holdings in foreign currency reserves:

16 central banks have publicly reported that they hold AUD (Table 1). However, this

information is typically based on Annual Report data in most cases, for 2011 so any

recent changes in reserve composition will not be reflected.

o 6 reported the actual share of AUD in their reserve holdings, which ranged from

0.4 to 8.0 per cent.o The remaining 10 explicitly included AUD within an other currenciescategory,

or otherwise acknowledged that AUD are held in reserves.

18 central banks appear to hold AUD, even though they have not reported this officially

(Table 2). These include central banks that have been reported by the media to have

invested in AUD (including Germany) and those that report a sizeable other currencies

category but do not specify which currencies are included.

1


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Table 2: Central Banks Possibly Holding AUD

Region Country Evidence of AUD Holdings

Major economy China Anecdotal evidence*

Major economy France Anecdotal evidence*

Major economy Germany According to media reports*

Asia India Large Other Currencies Category

Asia Indonesia According to media reports*

Asia Israel According to media reports*

Asia Malaysia Large Other Currencies Category*

Asia Philippines Large Other Currencies CategoryAsia Singapore Diversified range of FX assets*

Asia South Korea According to media reports*

Asia Thailand According to media reports*

Asia Vietnam According to media reports

Europe Austria Anecdotal evidence*

Europe Lithuania Large Other Currencies Category

Europe Romania Large Other Currencies Category

Other Jordan Large Other Currencies Category

Other Peru Large Other Currencies Category

Other South Africa Large Other Currencies Category

* The Dealing Room believes these countries hold AUD reserves

Table 3: Central Banks Not Holding AUD

Region Country

Major economy Canada

Major economy European Central Bank

Major economy Japan


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Market Analysis Section

3 August 2012

Table 4: Central Banks with Unknown Foreign Currency Reserves

Region Country

Europe Belgium

Europe Bulgaria

Europe Croatia

Europe Cyprus

Europe Estonia

Europe Greece

Europe Portugal

Europe Spain

Europe Turkey

Europe Ukraine

Other Argentina

Other Costa RicaOther Ecuador

Other Egypt

Other El Salvador

Other Uruguay


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From:Sent: Monday, 13 August 2012 10:20 AM

To:Cc:Subject: RE: Central Bank Holdings of Australian Dollars [SEC=UNCLASSIFIED]

HiWevebeenunabletouncoveranyofficialannouncementsfromtheseMiddleEasterncountriesregardingtheirholdingsofAustraliandollars.However,basedontheirrelativelylargeholdingsofFXreservesandthemediareportsbelow,wewouldclassifyUAE,SaudiArabia,QatarandKuwaitascountriespossiblyholdingAUD.ThecompositionofIransFXreserves,ontheotherhand,wouldmostlikelybeclassifiedasunknownWewillfollowthisupwithhttp://press/summary/views/external/pdf/00157368852/http://blogs.wsj.com/dealjournalaustralia/2012/06/14/germany-is-late-to-the-aussie-bond-party/

Regards,| Analyst | Market Analysis, International Department

RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000| w: www.rba.gov.au

2


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Regards,

| Analyst | Market Analysis, International DepartmentRESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000

| w: www.rba.gov.au


6/33


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Is The Australian Dollar Overvalued?

The A$ is around its highest level since 1985 in nominal TWI terms and its highest level since

1974 in real TWI terms.

Against the US$ and RMB, the A$ is 5-6 per cent below its post-float highs (reached inJuly 2011 and April 2011, respectively);

Against the euro, the A$ is at its highest level since the euros inception.

Currently, the high A$ is probably a bit above the level justified by fundamentals, given the

recent decline in the terms of trade and deterioration in the global economic outlook.

However, it is not clear that the A$ is substantially overvalued:

0.3

0.6

0.9

1.2

50

100

150

200

1984 1988 1992 1996 2000 2004 2008 2012

Austral ian Dol lar

Index,Yen

US$,Euro

US$ per A$ (RHS)

TWI (LHS)**

Europer A$ (RHS)*

Yen per A$ (LHS)

* DeutscheMark splice for observations prior to 1999** Indexed to post-float average =100Sources: Bloomberg; RBA; Thomson Reuters; WM/Reuters

70

100

130

160

190

70

100

130

160

190

1970 1977 1984 1991 1998 2005 2012

Index Index

Nominal TWI Real TWI

Sources: ABS; RBA; ThomsonReuters; WM/Reuters

Aust ral ian Dol lar TWIPost-float average =100

3


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Most models that we tend to focus on suggest the A$ could be 4-15% overvalued (Table 1,

graphs for RBA models).

In the RBA models, the exchange rate lies within or just outside a 1 standard deviation(st dev) band around the equilibrium estimate. All are within 2 st devs but the nature

of exchange rate modelling is such that a +/- 2 st dev band is very wide.

The results can differ according to model specification and sample period, but nonepoint to substantial overvaluation (particularly given the uncertainty regarding such

estimates).

RBAs models are based on the long-run relationship between the real exchange rateand the terms of trade, and usually also the real policy rate differential with the G3.

Model 1 from 1971 A$ is 19-23% undervalued. This highlights the sensitivity ofthe results to the sample period used.

Model 2 from 1986, the preferred model A$ is 4-6% overvalued. (Note expected growth differentials and relative risk premia may not be adequately

captured by the variables already included in the model. The latter issue may be

particularly problematic of late).

Model 3 from 2002 A$ is 12-13% overvalued. The coefficients are more heavilyinfluenced by short term shocks such as the transitory terms of trade spike

in 2011 which foreign exchange rate markets may have looked through.

Accordingly, the standard deviation band is also wider.

Some other external models (e.g. those produced by the IMF and The Economists BigMac Index) also suggest the real exchange rate is slightly overvalued.

The Economist Intelligence Units Worldwide Cost of Living Index suggests it is


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The Treasury, in its recent Roundup article on the Australian dollar, reported anovervaluation range of 11-35% (see Attachment). However they conclude the following

regarding these estimates:

Thus, while estimates suggesting that the real exchange rate is above its medium-to-

long term equilibrium may provide information about the likely direction of theexchange rate over an extended period of time, they need not imply that its current

level is undesirably high, nor that intervention is w arranted.(our emphasis)

RBA forecasts suggest the equilibrium exchange rate could be around 14% lower in two

years time (but still well within a 2 standard deviation band of the current exchange rate).

The forecasts reflect projected further declines in the terms of trade. Whileexpectations should already be reflected in the current level of the exchange rate (orincorporated in expectations about domestic versus foreign inflation), it is unclear how

much these expectations are already incorporated in the current estimate of the

equilibrium.

These forecasts could provide a more long-run view about the equilibrium exchangerate, which is potentially more comparable with other models (PPP, some IMF models)

that take a more long-run approach.

Model 1 Model 2

160

220

160

220

'Equilibrium' Real Exchange RateModel 1 excl. dummy variable, post-float average real TWI =100

Index Index

Observed real

TWI

'Equilibrium' term*(+/- 1 std. dev. of historical

long-run deviations)

Forecast

140140

'Equilibrium' Real Exchange RateModel 2 excl. dummy variable, post-float average real TWI =100

Index Index

Observed real

TWI

'Equilibrium' term*(+/- 1 std. dev. of historical

l d i ti )

Forecast


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ATTACHMENT: Treasury Roundup Article

The Treasury reported an overvaluation range of 11-35% based on estimates of the long-run

equilibrium for the exchange rate. Note:

These estimates exclude cyclical and, in the case of the PPP models, even structuralfactors (whereas the RBA estimates are based on more current fundamentals that include

cyclical elements)

Treasury notes there are many reasons to question the validity of PPP-basedestimates.

The results for the IMF models shown below are quite dated October 2011. The mostrecent IMF results are for June 2012 and are given in our table above.

Furthermore, Treasury notes the IMF results are not statistically significant and donot take into account cyclical divergences in economic activity and relative

interest rates.


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As the current challenges faced by the Australian economy are quite different to those faced

by the Swiss, there is no coherent reason for the RBA to follow the lead of the SNB and lower

the value of the AUD. While the SNBs approach is consistent with its mandate given its

circumstances, adopting the same approach here would raise fundamental conflicts with the

RBAs inflation target. p56, Box 2

As such, calls for Australia to shift away from its long-standing policy approach and take

action directed at lowering the value of the AUD are misplaced. Rather than helping the

economy, the available options are likely to be either ineffective or result in greater

macroeconomic instability. The combination of flexible inflation-targeting monetary policy and

a floating exchange rate has served Australia well in delivering macroeconomic stability

through a range of shocks over the past two decades. There is no coherent reason to believe

that it is inappropriate for current economic circumstances. p57

Specifically on monetary policy:

Should the exchange rate become too high for macroeconomic purposes, this will be reflected

in rising spare capacity and, ultimately, declining inflation. In these circumstances we could

expect that monetary policy would be eased, putting downward pressure on the exchange

rate. Hence, the appropriate remedy for an excessively high exchange rate is already available

within the existing inflation-targeting framework. p51

On fiscal policy:

The substantial fiscal consolidation currently under way, totalling 4 per cent of GDP between

2009-10 and 2012-13, is already helping to moderate upward pressure on the AUD. Achieving

a substantially lower exchange rate through this avenue would therefore require a much larger

fiscal contraction than is appropriate given the global economic environment currently facing


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Balance of Payments and International Investment Position June Quarter 2012

4


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Financial Account


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roll out of these positions). This may have contributed to the capital outflow if foreign ownership

of these bonds was particularly high and/or the holdings were not rolled over into new

positions.2

Despite the net outflow of capital from the general government sector, the total stock of foreignholdings of government securities increased during the quarter, owing to positive valuation

effects associated with the fall in bond yields. Overall, foreign ownership of CGS fell slightly to

76.1 per cent in the June quarter (from 76.5 per cent in the March quarter).Graph 4 Graph 5

-10

-5

0

5

10

Australi an Capi tal FlowsNet inflows, per cent of GDP

Annual

2008

%%

Current accountdeficit (s.a.)

-10

-5

0

5

10

Quarterly

20062004 20122010

Private and other*

2002

Official reserveassets

Generalgovernment

* Assumes all direct investment is private. Includes state government andpublic corporations, and adjusted for the US dollar swap facility in 2008and 2009.

Sources: ABS; RBA

-10

-5

0

5

10

General Government Portfoli o Debt Flows*Gross flows, per cent of GDP

Annual

2008

%%

-10

-5

0

5

10

Quarterly

20062004 20122010

Net inflow

Australian investment abroad

Foreign investment inAustralia

* Excludes State government and public corporations.Sources: ABS; RBA

2002


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CONFIDENTIAL

Financial Markets and the Banks Operations September 2012 MeetingATTACHMENT

Is the Australian Dollar Overvalued?

The high level of the Australian dollar has been an important factor in the adjustment of theAustralian economy to the higher level of the terms of trade over recent years. However, theexchange rate has remained near its highs notwithstanding the deterioration in the global economicoutlook, the recent decline in the terms of trade and ongoing fragility of global financial markets.

This paper discusses recent developments in the Australian dollar relative to its fundamentaldeterminants.

The Australian Dollar and Fundamentals

Over a long run of years, the terms of trade have been the predominant influence on theAustralian dollar. However, at various points in time, other factors have also been important,including differences in interest rates between Australia and other countries, and perceptions aboutAustralia as an attractive place to invest. For example, around 2000, at the height of the tech bubble,

the Australian dollar was lower than suggested by fundamentals. The perception was that Australiawas a less attractive place to invest because of its reliance on commodities and lack of a sizeabletech sector.

The terms of trade have fallen by around 15 per cent from their historical high in September lastyear and are expected to fall further. Nevertheless, they still remain at a very high level and part ofthe recent decline reflects the unwinding of the temporary increase in Australian export prices (mostnotably coal prices) due to natural disasters.

5


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CONFIDENTIAL

Financial Markets and the Banks Operations September 2012 MeetingAustralian banking sector. Aggregate net capital inflows relative to GDP over the past two years

have generally been below the historical average.

Econometric modelling can be used to more formally estimate a medium-term equilibrium levelof the exchange rate based on its historical relationship with economic fundamentals. Theseexercises, while subject to a reasonable degree of uncertainty, suggest that the Australian dollar isovervalued, but not substantially so:

Most models including the staffs internal models and the IMFs models suggest the exchangerate is overvalued by 415 per cent. The range of estimates reflects differences in the choice of

-10

-5

0

5

10

Australian Capital FlowsNet flows, per cent of GDP

Annual%%

-10

-5

0

5

10

Quarterly

OtherNet capital flows

Banking sectordebt*

200720031999 201220101991

Public sector

* Excludes direct investment and includes US dollar swap facility in 2008-09Sources: ABS; RBA

1995


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CONFIDENTIAL

Financial Markets and the Banks Operations September 2012 Meeting Illustrating the sensitivity of the model results, if this model is estimated over a substantially

longer (starting in 1971) or shorter (starting in 2002) period, the current level of the exchangerate is estimated as being between 23 per cent undervalued and 13 per cent overvalued.

Models of the Australian Dollar

Estimated exchange rate valuation

Under/overvaluation Per cent deviation

Staff models

From 1971* Under 23From 1986 Over 4

From 2002 Over 13

External models

IMF models Over 515

Big Mac Index (PPP based) Over 8

* Model excludes the real interest rate differential

Sources: The Economist; IMF; RBA

It should be noted that there are some external estimates that suggest the Australian dollar ismore than 30 per cent overvalued. In contrast to the staffs preferred model, these estimatestypically exclude both cyclical and structural factors such as real interest rate differentials andthe terms of trade from their assessments of equilibrium.

The Swiss Case

Last September, the Swiss National Bank (SNB) imposed a 1.20 Swiss franc (CHF) per euro


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CONFIDENTIAL

Financial Markets and the Banks Operations September 2012 MeetingThe unusually rapid pace of appreciation in the CHF last year occurred against a background of

vulnerabilities in the Swiss economy, particularly given its exposures to the rest of Europe and itsvery large (and already stressed) financial sector. The Swiss traded sector is equivalent to around90 per cent of domestic GDP (compared to 40 per cent for Australia) and around 70 per cent of itsmerchandise trade is with the European Union (compared to 15 per cent for Australia).Furthermore, Switzerland has a large reliance on manufacturing exports that are sensitive toexchange rate fluctuations (whereas the rural and resource sectors account for the largest share ofAustralian exports). As a result, the Swiss authorities were particularly concerned about the loss of

external competitiveness and deflationary pressures (which have subsequently been borne out) fromthe rapid appreciation of the exchange rate from an already very high value.

CPI InflationYear-ended

-10

-5

0

5

-10

-5

0

5

* CP I excluding seasonal food, beverages, tobacco and energy for Switzerland;

2012

Tradables**

%Switzerland Australia

Underlying*

Headline

20072002201220072002

%

6


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A Sectoral Breakdown of Capital Flows June Quarter 2012

As in the BOP release

there was a net outflow from general

government debt of 0.7 per cent of GDP;however, the FA data reveal a somewhat

offsetting net inflow of 0.4 per cent of GDP to

state and local government debt (which are

included with private flows in the BOP

release) in the June quarter. This reallocation

of state and local government capital flows

saw the net outflow from the public sector

6


21/33

Graph 2 As a result of these flows, there was a slight

decline in the share of Commonwealth

government securities held by foreigners (to

76.7 per cent) and a small increase in the foreign

ownership share of state and local governmentsecurities (to 37.4 per cent; Graph 2).

Foreign Ownership of Australian DebtShare of outstandings

2004 2008 20120

20

40

60

80

2004 2008 20120

20

40

60

80

Source: ABS

Commonwealth

%Non-government% Government

Semi Asset-backed

Financial

Non-financial

7


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From:Sent: Friday, 14 December 2012 6:40 PMTo:Cc:

Subject: Australian Dollar Model Results [SEC=UNCLASSIFIED]

Dear

OurpreferredmodelindicatesthattheAustraliandollariscurrentlyovervaluedbyabout7percent,whichisaround

onestandard

deviation

from

the

estimated

long

run

equilibrium

real

exchange

rate.

This

is

somewhat

larger

than

ourestimateofanovervaluationoftheexchangerateofaround4percentinSeptember2012(whichwasreported

intheSeptemberBoardattachment).Alternativeapproacheslargelyconfirmthatthereisasubstantialdegreeof

uncertaintyinproducingestimatesofunderorovervaluation. Thatis,ifourpreferredmodelisestimatedovera

substantiallylonger(startingin1971)orshorter(startingin2002)period,thecurrentleveloftheexchangerateis

estimatedasbeingbetween18percentundervalued(1standarddeviation)and14percentovervalued(1

standarddeviations).NotethattheestimatesfromtheIMFmodelsandBigMacindexarenowsomewhatdated.

Regards

7


23/33


24/33

| Senior Analyst | International DepartmentRESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000

| w: www.rba.gov.au

8


25/33

Composition of Foreign Exchange holdings of International Countries - AUD Focus

Number holding AUD: 15 Answered

Number possibly holding AUD: 8 May never know answer

Not holding AUD 20 Needs further investigation

Country Central bank Series description Base Currency Hold AUD? Assumed AUD holdings Other info Link Article Documentation Year of latest AR

Argentina Banco Central de la Republica Argentina None Peso ? No annual reportsPrimary 1989Australia Reserve Bank of Australia Currency and residuaAustralian dollar #N/A Table 32 Primary 2012

Armenia Central Bank of the Republic of Armenia Currency compositio Armenian drams No Currency held ap Primary Armenia 2011

Austria Oesterreichische Nationalbank Euro Primary

Belarus, Republic of National Bank of the Republic of Belarus Belarusian ruble Yes Page 137 of Annu Primary

Brazil Banco Central do Brasil Brazilian Real Yes 3.10% Primary Secondary 2010

Belgium Nationale Bank van Belgi Euro Primary

Bulgaria Bulgarian National Bank Euro Primary

Canada Department of Finance Canada Currency compositio CAD No Reserves only co Primary Canada 2011

Colombia Banco de la Republica Colombia Currency compositio Peso No Composition is 85 Primary 2009

Croatia Croatian National Bank Kuns Primary

Czech Republic Czech National Bank Annual Report 2011 Koruna Yes 5.30% Primary

Chile Banco Centrale de Chile Peso Yes


26/33

Luxembourg Banque Centrale du Luxembourg Balance sheet - asset Euro No Breakdown in BS Primary

Lithuania Lietuvos Bankas Countries not in SDR Euro Yes If assumption that all non-Other open positi Primary

Macedonia, FYR National Bank of the Republic of Macedonia Denar Yes Included in an "other" cateTalks about diversPrimary Macedonia, FYR

Malta Bank Centrali ta' Malta Balance sheet - asset Euro No Primary

Moldova, Republic of National Bank of Moldova Currency composito Leu Possibly


27/33

Country Re fere nce Artic le

Finland Link

Italy Link

Macedonia, Link
http://www.suomenpankki.fi/en/Pages/default.aspxhttp://www.bancaditalia.it/pubblicazioni/relann/rel11/rel10en/en_rel_2011.pdfhttp://www.nbrm.mk/WBStorage/Files/WebBuilder_Annual_Report_2011.pdfhttp://www.nbrm.mk/WBStorage/Files/WebBuilder_Annual_Report_2011.pdfhttp://www.bancaditalia.it/pubblicazioni/relann/rel11/rel10en/en_rel_2011.pdfhttp://www.suomenpankki.fi/en/Pages/default.aspx


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Moldova, Re Link

Netherlands Link

Poland Link
http://www.bnm.md/en/annual_reporthttp://www.bnm.md/en/annual_reporthttp://www.dnb.nl/en/binaries/AR2011_tcm47-270450.pdfhttp://www.nbp.pl/en/publikacje/r_roczny/rocznik2010_en.pdfhttp://www.nbp.pl/en/publikacje/r_roczny/rocznik2010_en.pdfhttp://www.dnb.nl/en/binaries/AR2011_tcm47-270450.pdfhttp://www.bnm.md/en/annual_report


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Romania Link

Canada

Armenia
http://www.bnro.ro/Regular-publications-2504.aspxhttp://www.bnro.ro/Regular-publications-2504.aspx


30/33

Georgia

Hong Kong


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Sweden


32/33

Country Hold reserves in ATotal reserves AUD Reserves % of Total reserves/ capital inflows???


33/33

Original Regions speculated to have bought Aussie:

Asia Also large fund managers?

Reuters South America

Western Europe

AFR http://afr.com/p/markets/russia_joins_growing_club_OzQabIsLkKBEKzbwtTYh6L

Speculation that COFER data on the "other" reserves category is largely AUD is

backed up by turnover data suggesting the Aussie is the 5th most heavily trade

currency in 2010, with traders consensus agreeing that volumes have picked upsince then.
http://afr.com/p/markets/russia_joins_growing_club_OzQabIsLkKBEKzbwtTYh6Lhttp://afr.com/p/markets/russia_joins_growing_club_OzQabIsLkKBEKzbwtTYh6L

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