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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 publicly available 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 currencies” category, 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. 21 central banks (including the Fed, ECB, BoJ, BoE and Bank of Canada) do not hold AUD (Table 3). These central banks have either provided the full composition of their foreign currency reserves or made statements regarding which foreign currencies were included in their reserves, with no reference to the AUD. For the remaining 16 central banks, we have been unable to uncover sufficient information on the currency composition of the reserves (Table 4).
Table 1: Central Banks Holding AUD Region Asia Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Other Other Other Country Hong Kong Belarus Czech Republic Georgia Finland Iceland Macedonia Poland Russian Federation Slovak Republic Slovenia Sweden Switzerland Brazil Chile Kazakhstan Date 2011 2010 2011 2011 2011 2011 2012 2010 2012 2011 2011 2011 2012 2012 2011 2012 AUD Holdings Reference to AUD in reserves Reference to AUD in reserves 5.3 per cent of reserves Reference to AUD in reserves 0.4 per cent of reserves 0.5 per cent of reserves Reference to AUD in reserves 8.0 per cent of reserves Reference to AUD in reserves Reference to AUD in reserves Reference to AUD in reserves 3.8 per cent of reserves Reference to AUD in reserves 3.1 per cent of reserves Reference to AUD in reserves Reference to AUD in reserves

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” Category Asia 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 Major economy Major economy Major economy Major economy Major economy Asia Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Other Other Other Other Other Country Canada European Central Bank Japan United Kingdom United States New Zealand Denmark Hungary Ireland Italy Latvia Luxembourg Malta Moldova Netherlands Norway Armenia Colombia Mexico Morocco Tunisia

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Table 4: Central Banks with Unknown Foreign Currency Reserves Region Europe Europe Europe Europe Europe Europe Europe Europe Europe Europe Other Other Other Other Other Other Country Belgium Bulgaria Croatia Cyprus Estonia Greece Portugal Spain Turkey Ukraine Argentina Costa Rica Ecuador Egypt El Salvador Uruguay

Market Analysis Section 3 August 2012

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2

From: Sent: To: Cc: Subject:

Monday, 13 August 2012 10:20 AM RE: Central Bank Holdings of Australian Dollars [SEC=UNCLASSIFIED]

Hi  We’ve been unable to uncover any official announcements from these Middle Eastern countries regarding  their holdings of Australian dollars. However, based on their relatively large holdings of FX reserves and  the media reports below, we would classify UAE, Saudi Arabia, Qatar and Kuwait as countries possibly  holding AUD. The composition of Iran’s FX reserves, on the other hand, would most likely be classified as  “unknown”  We will follow this up with http://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 

 
From: Sent: Tuesday, 7 August 2012 8:45 AM To: Cc: Subject: RE: Central Bank Holdings of Australian Dollars [SEC=UNCLASSIFIED]

  Thanks,   and   Very useful. Did you looks at the Middle East and SWF?  (There is an article on page 3 of the AFR if you haven’t seen  it yet.) 

 
From: Sent: Friday, 3 August 2012 5:47 PM To: Cc: ID Market Analysis Subject: 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 publicly available information (including central bank Annual  Reports) and anecdotal evidence to identify which central banks (and affiliated finance ministries) hold AUD. 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.   
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Regards, | Analyst | Market Analysis, International Department RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000 | w: www.rba.gov.au 

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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 in July 2011 and April 2011, respectively); Against the euro, the A$ is at its highest level since the euro’s inception.
Australian Dollar
Index, Yen Euro per A$ (RHS)* 200 1.2
190 190

Australian Dollar TWI
Post-float average = 100

US$, Euro

Index

Index

160

160 Nominal TWI Real TWI 130

150 US$ per A$ (RHS)

TWI (LHS)**

0.9
130

100

0.6
100 100

Yen per A$ (LHS) 50 1984 0.3 1988 1992 1996 2000 2004 2008 2012

70 1970

70 1977 1984 1991 1998 2005 2012

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

Sources: ABS; RBA; Thomson Reuters; WM/Reuters

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: • The terms of trade still remain high, despite having fallen by “more than 10 per cent” (as characterised in the SMP) from their Sep Q 2011 peak (more updated projections suggest a 15 per cent fall to Sep Q 2012). Note that this fall has been exacerbated by the unwinding of the effect of natural disasters on Australian export prices (most notably coal prices). The recent experience of the A$ is not unique. It has performed roughly in line with comparable currencies (NZD, CAD) and has modestly underperformed global equity markets over 2012 to date, notwithstanding the euro’s depreciation and declines in global commodity prices.
Australian Dollar and Other Assets*
Over 2012 to-date % 10 % 10

5

5

0

0

-5

-5

S&P 500

EM currencies

CRB Index

Euro

*Against US dollar or in US dollar terms, except for EuroStoxx

Canadian dollar

Westpac ICP

MSCI World

Euro Stoxx

NZ dollar

RBA ICP

AUD

-10

-10

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 none point to substantial overvaluation (particularly given the uncertainty regarding such estimates). RBA’s models are based on the long-run relationship between the real exchange rate and 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 of the 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 heavily influenced 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 Economist’s Big Mac Index) also suggest the real exchange rate is slightly overvalued. The Economist Intelligence Unit’s Worldwide Cost of Living Index suggests it is currently 47 per cent more expensive for executives to live in Sydney than in New York. This may be interpreted as an overvaluation of the exchange rate, as it appears to be an absolute PPP-type measure using comparable baskets. However, the index is largely comprised of non-tradeable prices that can diverge permanently across economies and therefore cannot be interpreted as an estimate of ‘fair value’. Furthermore, New York appears to be a relatively cheap city by this measure and the 47 per cent figure would be smaller if a wider comparison was made.
Table 1: Models of the Australian Dollar -- Summary Estimated exchange rate valuation Under/over—valuation Per cent deviation Standard deviations RBA Models Terms of trade only From 1971 (Model 1) From 1986 From 2002 Adding real interest rate diffΔ From 1986 (Model 2) From 2002 (Model 3)

Under Over Over

19*–23 4–6* 12

1.1–1.2 0.5–0.9 1.4

Over Over

4–6* 13

0.5–0.9 1.4

External Models 5–15 IMF Models Over Big Mac Index (PPP model) Over 8 Δ Model from 1971 assigns the wrong sign to the real interest rate differential coefficient and is therefore omitted * Indicates result for model including a dummy variable capturing the portfolio shift in demand for A$ denominated assets from 2000–2002

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The Treasury, in its recent Roundup article on the Australian dollar, reported an overvaluation 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-tolong term equilibrium may provide information about the likely direction of the exchange rate over an extended period of time, they need not imply that its current level is undesirably high, nor that intervention is warranted.’ (our emphasis)

RBA forecasts suggest the equilibrium exchange rate could be around 1–4% 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. While expectations should already be reflected in the current level of the exchange rate (or incorporated 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 exchange rate, which is potentially more comparable with other models (PPP, some IMF models) that take a more long-run approach. Model 1
'Equilibrium' Real Exchange Rate
Model 1 excl. dummy variable, post-float average real TWI = 100 Index Forecast Index Index Forecast

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

220 'Equilibrium' term* 160 Observed real TWI
(+/- 1 std. dev. of historical long-run deviations)

220 140 Observed real TWI 'Equilibrium' term*
(+/- 1 std. dev. of historical long-run deviations)

140

160

100 100 Based on market forecasts** 40 1977 1983 1989 1995 2001 2007 2013 100 Based on market forecasts**

100

Terms of trade coefficient = 0.99 40 1971

Terms of trade coefficient = 0.66 60 1985 1989 1993 1997 2001

60 2005 2009 2013

* forecast based on RBA forecasts ** Market forecasts of the terms of trade and the cash rate

* forecast based on RBA terms of trade forecast and constant cash rate ** Market forecasts of the terms of trade and the cash rate

Model 3
'Equilibrium' Real Exchange Rate
Model 3 excl. dummy variable, post-float average real TWI = 100 Index Forecast 'Equilibrium' term* 130
(+/- 1 std. dev. of historical long-run deviations)

Index

130

100 Observed real TWI Based on market forecasts**

100

Terms of trade coefficient = 0.58 70 2002 2004 2006 2008 2010

70 2012 2014

* forecast based on RBA terms of trade forecast and constant cash rate ** Market forecasts of the terms of trade and the cash rate

3

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 structural factors (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-based estimates’. • The results for the IMF models shown below are quite dated – October 2011. The most recent IMF results are for June 2012 and are given in our table above. − Furthermore, Treasury notes the IMF results are not statistically significant and do not ‘take into account cyclical divergences in economic activity and relative interest rates’.

Quotes from the article: On intervention: ‘Even if sterilised intervention was effective in lowering the exchange rate, the same problem of incompatible policy objectives would still arise. If the central bank continued to target inflation, it would need to offset the stimulatory effect of the lower exchange rate by raising interest rates, which would in turn tend to push the exchange rate back up. This is why decisions on intervention are appropriately a matter for the RBA.’ p52 ‘While the RBA does not take a completely ‘hands off’ approach to the exchange rate, it nowadays intervenes only during periods of market dysfunction (RBA 2011).’ p52, footnote 9. (Note the referenced RBA Bulletin article only stated that we had recently intervened because of market dysfunction, but was careful not to make any policy statements about why we may or may not intervene in the future. Last year’s Annual Report was similarly cautious in its wording, noting that foreign exchange intervention ‘tends to be specific to the particular episode’. This year’s Annual Report says ‘the Bank retains discretion to intervene to address dislocated markets and gross misalignments of the exchange rate’.)

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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 SNB’s approach is consistent with its mandate given its circumstances, adopting the same approach here would raise fundamental conflicts with the RBA’s 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 4½ 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 Australia.’

Market Analysis International Department 17 August 2012

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4
Balance of Payments and International Investment Position — June Quarter 2012

Financial Account

In contrast to the previous nine quarters, when net capital inflows to the public sector averaged 3.3 per cent of GDP, net flows were close to zero in the June quarter, reflecting: – An outflow of 0.7 per cent of GDP to the General Government sector (Graph 5); and

The net outflow of capital from the general government sector may have been affected by a number of factors. While there was a small net maturity of Commonwealth Government securities (CGS) in the June quarter, a large bond matured and another large bond became due for maturity within a year’s time (which is a trigger for some investors – including some central banks - to

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 foreign holdings 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
Australian Capital Flows
Net inflows, per cent of GDP % Annual Quarterly %
%

Graph 5
General Government Portfolio Debt Flows*
Gross flows, per cent of GDP Annual Quarterly %

10 Private and other* 5 General government

10

10

10

5

5 Net inflow

Foreign investment in Australia

5

0 Official reserve assets -5 Current account deficit (s.a.)

0

0 Australian investment abroad

0

-5

-5

-5

-10

2002
*

2004

2006

2008

2010

2012

-10

-10

2002

2004

2006

2008

2010

2012

-10

Assumes all direct investment is private. Includes state government and public corporations, and adjusted for the US dollar swap facility in 2008 and 2009. Sources: ABS; RBA

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

2

One possible scenario is that some of the proceeds from these bond maturities or bond sales might have been held in cash prior to being reinvested

/ Market Analysis / International Department / Financial Conditions Section / Economic Analysis Department 4 September 2012

5

CONFIDENTIAL
Financial Markets and the Bank’s Operations September 2012 Meeting

ATTACHMENT

Is the Australian Dollar Overvalued?
The high level of the Australian dollar has been an important factor in the adjustment of the Australian economy to the higher level of the terms of trade over recent years. However, the exchange rate has remained near its highs notwithstanding the deterioration in the global economic outlook, 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 fundamental determinants. The Australian Dollar and Fundamentals Over a long run of years, the terms of trade have been the predominant influence on the Australian 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 about Australia 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 Australia was a less attractive place to invest because of its reliance on commodities and lack of a sizeable tech sector. The terms of trade have fallen by around 15 per cent from their historical high in September last year and are expected to fall further. Nevertheless, they still remain at a very high level and part of the recent decline reflects the unwinding of the temporary increase in Australian export prices (most notably coal prices) due to natural disasters.
Real Exchange Rate and Terms of Trade
Post-float average = 100; log scale Index Goods terms of trade 180 180 Index

140

140

100

100

Real exchange rate

60 1987 1992 1997 2002 2007
Sources: ABS; RBA; Thomson Reuters; WM/Reuters

60 2012

The strong demand for Australian government debt – reflected in increased foreign ownership of Commonwealth Government securities – has been highlighted as a factor contributing to the higher Australian dollar. Australia has been one beneficiary of the global portfolio reallocation to highly rated assets resulting from the increased relative riskiness of holding euro-denominated assets. Canada and a number of Scandinavian countries, as well as Switzerland, have seen similar flows. While increased demand for Australian government debt by foreign sovereigns would put upward pressure on the currency, other things equal, it is important to note that the strong foreign demand for Australian government debt over recent years has largely replaced capital inflows into the

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CONFIDENTIAL
Financial Markets and the Bank’s Operations September 2012 Meeting

Australian banking sector. Aggregate net capital inflows relative to GDP over the past two years have generally been below the historical average.
Australian Capital Flows
Net flows, per cent of GDP % Annual Quarterly %

10 Net capital flows 5 Other

10

5

0 Public sector -5 Banking sector debt* -10 1991 1995 1999 2003 2007 2010 2012

0

-5

-10

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

Econometric modelling can be used to more formally estimate a medium-term ‘equilibrium’ level of the exchange rate based on its historical relationship with economic fundamentals. These exercises, while subject to a reasonable degree of uncertainty, suggest that the Australian dollar is overvalued, but not substantially so: • Most models – including the staff’s internal models and the IMF’s models suggest the exchange rate is overvalued by 4–15 per cent. The range of estimates reflects differences in the choice of economic fundamentals and time periods that are used to estimate the ‘equilibrium’ levels. The staff’s preferred model is based on the long-run relationship between the real exchange rate and the terms of trade and the real policy rate differential with the G3 (US, euro area and Japan) over the post-float period. It suggests the exchange rate is around 5 per cent overvalued. However, given the uncertainty of the estimates, the model also suggests that the exchange rate could be reasonably assessed (at roughly a 70 per cent probability) as being anywhere between 4 per cent undervalued and 12 per cent overvalued (shown by the shaded band on the graph).
‘Equilibrium’ Real Exchange Rate
Post-float average real TWI = 100 Index 160 140 120 100 80 60
*
l l l l l l l l l l l l l l l l l l l l l l l l l l

Index 160 140 120 100 80
l 60 2012

‘Equilibrium’ term* Observed real TWI
(+/- 1 std. dev. of historical long-run deviations)

1987

1992

1997

2002

2007

September 2012 forecast based on the RBA terms of trade forecast and an unchanged real interest rate differential Source: RBA

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CONFIDENTIAL
Financial Markets and the Bank’s 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 exchange rate is estimated as being between 23 per cent undervalued and 13 per cent overvalued.
Models of the Australian Dollar Estimated exchange rate valuation Under/over—valuation Staff models From 1971* From 1986 From 2002 External models IMF models Big Mac Index (PPP based)
* Model excludes the real interest rate differential Sources: The Economist; IMF; RBA

Per cent deviation

Under Over Over

23 4 13

Over Over

5–15 8

It should be noted that there are some external estimates that suggest the Australian dollar is more than 30 per cent overvalued. In contrast to the staff’s preferred model, these estimates typically exclude both cyclical and structural factors – such as real interest rate differentials and the 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 ceiling, and made a commitment to purchase ‘unlimited quantities of foreign currency’ as necessary to defend the ceiling. As a result of this commitment, the SNB purchased around €130 billion worth of foreign exchange in total over May, June and July this year, taking their foreign exchange reserve holdings up to almost 70 per cent of annual GDP from around 40 per cent of GDP three months earlier. The introduction of the ceiling was based on their assessment that the CHF was ‘massively overvalued’ and posed an ‘acute threat’ to the Swiss economy. As a traditional ‘safe-haven’ currency, the CHF had been the recipient of strong safe-haven flows that resulted in the currency appreciating by 28 per cent against the euro in the four months leading up to its peak in August 2011. Between end 2009 and the August 2011 peak, the real effective exchange rate appreciated by 26 per cent.
Swiss Real Effective Exchange Rate
Sample average = 100 Index Index

120

120

110

110

100

100

90

90

80 1987 1992 1997 2002 2007
Sources: BIS; Bloomberg

80 2012

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CONFIDENTIAL
Financial Markets and the Bank’s Operations September 2012 Meeting

The 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 its very large (and already stressed) financial sector. The Swiss traded sector is equivalent to around 90 per cent of domestic GDP (compared to 40 per cent for Australia) and around 70 per cent of its merchandise 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 to exchange rate fluctuations (whereas the rural and resource sectors account for the largest share of Australian 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) from the rapid appreciation of the exchange rate from an already very high value.
CPI Inflation
Year-ended % Switzerland Australia Underlying* 5 Headline 5 %

0 Tradables** -5

0

-5

-10
*

2002

2007

2012 2002

2007

-10 2012

CPI excluding seasonal food, beverages, tobacco and energy for Switzerland; trimmed mean CPI for Australia ** Imported goods and services CPI used for Switzerland Sources: ABS; RBA; Thomson Reuters

While the extreme circumstances facing Switzerland last year presented a clear and credible case for intervention, the circumstances in Australia cannot yet be considered comparable. There is not strong evidence that the Australian dollar is posing an imminent threat of deflation or is highly contractionary for the domestic economy. While those sectors of the Australian economy that are most exposed to external developments, such as manufacturing and tourism, have been adversely affected by the current high level of the Australian dollar, inflation is forecast to be within the target range over the next few years and the Australian economy is expected to grow at around 3 per cent over 2013 and 2014. This is partly related to the fact that the Australian economy (and financial sector) is less exposed to external developments (particularly in Europe) than the Swiss economy.

Financial Markets Group 30 August 2012

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6
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 revised down to 0.3 per cent of GDP and the net inflow to the private sector revised down to 1.7 per cent (from 2.1 per cent in the BOP release).

As reported in the BOP release, the net outflow from the general government sector may have been affected by a number of factors, namely a large government bond maturing and another coming due for maturity in a year’s time (which is a trigger for some investors - including some prominent central banks - to roll out of these positions). The net inflow to state government debt largely reflected a net increase in foreign investment in long-term state and local government debt, which was partially offset by a net decrease in foreign investment in their short-term debt.

Graph 1 Australian Capital Flows
Net flows, per cent of GDP % Annual Quarterly %

10 Other private 5 Net capital flows

10

5

0 General government* -5 Banking sector debt** 2002 2004 2006 2008 2010 2012
* Excludes Reserve Bank ** Includes US dollar swap facility in 2008-09 Sources: ABS; RBA

0

-5

-10

-10

1

Graph 2 Foreign Ownership of Australian Debt
Share of outstandings % Government Non-government Non-financial 80 Commonwealth Financial 80 %

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 government securities (to 37.4 per cent; Graph 2).

60

60

40 Semi 20 Asset-backed

40

20

0

2004
Source: ABS

2008

2012

2004

2008

0 2012

Market Analysis International Department 27 September 2012

2

7

From: Sent: To: Cc: Subject:

Friday, 14 December 2012 6:40 PM

Australian Dollar Model Results [SEC=UNCLASSIFIED]

Dear   Our preferred model indicates that the Australian dollar is currently overvalued by about 7 per cent, which is around  one standard deviation from the estimated long‐run ‘equilibrium’ real exchange rate. This is somewhat larger than  our estimate of an overvaluation of the exchange rate of around 4 per cent in September 2012 (which was reported  in the September Board attachment). Alternative approaches largely confirm that there is a substantial degree of  uncertainty in producing estimates of under or overvaluation.  That is, if our preferred model is estimated over a  substantially longer (starting in 1971) or shorter (starting in 2002) period, the current level of the exchange rate is  estimated as being between 18 per cent undervalued (1 standard deviation) and 14 per cent overvalued (1½  standard deviations). Note that the estimates from the IMF models and Big Mac index are now somewhat dated.    Regards       

 

1

 

 

 
2

 

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

3

8
Composition of Foreign Exchange holdings of International Countries - AUD Focus

Number holding AUD: Number possibly holding AUD: Not holding AUD

15 8 20

Answered May never know answer Needs further investigation

Country Argentina Australia Armenia Austria Belarus, Republic of Brazil Belgium Bulgaria Canada Colombia Croatia Czech Republic Chile China Costa Rica Cyprus Denmark Ecuador El Salvador Egypt Estonia Euro area Finland France Georgia Greece Germany Hong Kong, SAR, PRC Hungary Iceland Indonesia Israel India Ireland Italy Japan Jordan Kazakhstan Kyrgyz Republic Korea Latvia

Central bank Banco Central de la Republica Argentina Reserve Bank of Australia Central Bank of the Republic of Armenia Oesterreichische Nationalbank National Bank of the Republic of Belarus Banco Central do Brasil Nationale Bank van België Bulgarian National Bank Department of Finance Canada Banco de la Republica Colombia Croatian National Bank Czech National Bank Banco Centrale de Chile People's Bank of China Banco Central de Costa Rica (BCCR) Central Bank of Cyprus Danmarks NationalBank Banco Central del Ecuador Banco Central de Reserva de El Salvador Central Bank of Egypt Bank of Estonia European Central Bank Bank of Finland Banque de France National Bank of Georgia Bank of Greece Bundesbank HKMA Magyar Nemzeti Bank Central Bank of Iceland Bank of Indonesia Bank of Israel Reserve Bank of India Central Bank of Ireland Banca D'italia Bank of Japan/Ministry of Finance Central Bank of Jordan National Bank of Kazakhstan Not giving me much here… The Bank of Korea Latvijas Banka

Series description Base Currency None Peso Currency and residuaAustralian dollar Currency compositio Armenian drams Euro Belarusian ruble Brazilian Real Euro Euro Currency compositio CAD Currency compositio Peso Kuns Annual Report 2011 Koruna Peso None Renminbi Colon Euro Currency compositio Kroner US$ Colon None Pound Euro Currency allocation Euro Euro Euro Currency compositio Georgian Lari Euro Announced but not f Euro HKD Euro Krona Statistics Rupiah Israeli Shekel Rupee Euro Euro Yen Annual Report 2010 Dinar IIP Tenge Som Currency allocation Won None Lats

Hold AUD? ? #N/A No Yes Yes

No No Yes Yes ???

No ? ? No Yes Yes Yes Yes No Possibly Possibly Apparently so Not likely No No No Possibly Yes Yes No

Other info Link No annual reports Primary Table 32 Primary Currency held appPrimary Primary Page 137 of AnnuaPrimary Primary 3.10% Primary Primary Reserves only comPrimary Composition is 85 Primary Primary 5.30% Primary <10% Benchmark for po Primary Primary ? Primary Primary 0 Hold reserves in mPrimary Site not in English Primary Site not in English Primary Mention of reserv Primary Primary US$ and yen portf Primary 0.40% Possibly, publishe Primary Primary Total in Georgian Laris - co See table in Docum Primary Primary Media reports sta Primary <14.3% 78.2% allocated toPrimary Seems to be just UPrimary Foreign bonds by Primary Absolute numbersPrimary <$8 billion US$ Couldn't find on wPrimary Foreign currency aPrimary Basically holding nPrimary See table 22.2 Primary Foreign currency aPrimary Under "other" in f Primary I believe it's in the Primary Primary ? Couldn't find on wPrimary "The foreign curre Primary

Assumed AUD holdings

Article

Documentation

Armenia

Year of latest AR 1989 2012 2011

Secondary

2010

Canada

2011 2009

2011

Finland Georgia Secondary Hong Kong 2011 2011 2011 2012 (article) 2011

Secondary Secondary Italy Secondary Press release Secondary Secondary

2011

Luxembourg Lithuania Macedonia, FYR Malta Moldova, Republic of Malaysia Mexico Morocco Netherlands Norway Peru Poland Philippines Portugal Romania Russian Federation Singapore Slovenia Spain Switzerland Slovak Republic South Africa Sweden Thailand Turkey Tunisia Ukraine United States United Kingdom Uruguay

Banque Centrale du Luxembourg Lietuvos Bankas National Bank of the Republic of Macedonia Bank Centrali ta' Malta National Bank of Moldova Bank Negara Malaysia Banco de Mexico Bank Al-Maghrib De Nederlandsche Bank Norges Bank Banco Central de Reserva Del Peru Narodowy Bank Polski Bangko Sentral Ng Pilipinas Banco de Portugal Banca Nationala a Romaniei Bahk Pocchh Monetary Authority of Singapore Bank of Slovenia Banco de Espana Swiss National Bank Narodna Banka Slovenska South African Reserve Bank Sveriges Riksbank Bank of Thailand The Central Bank of the Republic of Turkey Central Bank of Tunisia National Bank of Ukraine Federal Reserve Bank of England Banco Central Del Uruguay

Balance sheet - asset Euro Countries not in SDR Euro Denar Balance sheet - asset Euro Currency compositonLeu Currency compositio Ringgit None Peso Balance sheet - asset Dirham Currency Composition Currency compositio Kroner Currency compositio Sole Currency compositio Zloty None Peso None Euro Currency compositio Leu AR doesn't open… Rouble None Dollar None Euro None Euro Currency Compositio Franc None Euro Rand Krona None Baht Market value of fore Lira None Dinar None? Hyrvnia Treasury and Fed ResDollar Currency compositio Pound Peso

No Breakdown in BS Primary Yes If assumption that all non-SOther open positi Primary Yes Included in an "other" cate Talks about divers Primary Primary No Possibly <0.03% Other currencies i Primary Possibly <23.4% In 2011 68.4% US$Primary Primary No Primary No No Breakdown of comPrimary No 75% USD, 25% EU Primary Possibly Holdings in US$ of Primary Yes 7.48 US$ bill. In 2010 their benc Primary "Other" quoted, no mention of AUD Other foreign cou Primary Primary No 66% Euro, 24% US Primary Yes Up to 1% of their total reseArticle suggest thaPrimary Possibly Pretty secretive abPrimary Primary Quite a lot of info Primary Yes See reserves spreaPrimary Primary Doesn't seem to be Apparently there'sPrimary Yes 10.1 SEK billion Also hold USD, Eu Primary No Only interested in Primary No Only Euro and US$Primary ? Primary ? Look closer - therePrimary Apparently not Predominately Ye Primary No BOE holds only USPrimary Not available in EnPrimary

Macedonia, FYR Moldova, Republi 2011

Netherlands

Poland Secondary Romania Secondary

Secondary Annual Report 11/12 Sweden

Secondary Secondary

Country Finland

Reference Link

Article

Italy

Link

Macedonia, F

Link

Moldova, Rep

Link

Netherlands

Link

Poland

Link

Romania

Link

Canada

Armenia

Georgia

Hong Kong

Sweden

Country

Hold reserves in A Total reserves

AUD Reserves

% of Total reserves/ capital inflows???

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

Regions speculated to have bought Aussie: Asia Also large fund managers? South America Western Europe 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 up since then.