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Why is Australia's 11th GDP firmly in the top 6 foreign exchange market? The Australian dollar will still rise in the short term!
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Market Review]: Why is Australia's 11th GDP firmly in the top 6 in the foreign exchange market? The Australian dollar can still rise in the short term!". Hope it will be helpful to you! The original content is as follows:
On Tuesday (September 16), the Australian dollar fell slightly against the US dollar and traded around 0.6664. The Australian dollar continued to strengthen recently due to the upcoming announcement of the results of the Federal Reserve's interest rate decision and the continued active global equity market. The Australian dollar has a unique position in the global foreign exchange market and is a currency that can use a eouu.cnpletely free floating exchange rate system, and has a high market influence and stable currency value. This advantage stems from the triple support. In addition, the eouu.cnmodity attributes are favorable to the recovery of the global economy, the Australian dollar is expected to continue its upward trend in the short term.
The Australian dollar has a unique position in the global foreign exchange market
The Australian dollar has a position in the global foreign exchange market far exceeding the Australian economy (GDP ranking 11 vs. Foreign exchange trading volume ranking 6), and is the only currency among the top ten currencies that has both eouu.cnpletely free floating and high influence. Among the top ten currencies, no currency can achieve such a high excess influence while implementing a eouu.cnpletely free floating exchange rate system.
The Australian dollar has eouu.cnmodity export attributes and is sensitive to global growth. Australian dollar assets have become a monetary asset for investors to gain risk-oriented exposure when they go long or hedge risks by shorting.
In the end, Australia's retirement savings assets are the fourth largest in the world (equivalent to 150% of GDP), of which 50% are invested overseas, and will rise to the second largest in the world (180% of GDP) in the next ten years, accounting for nearly 75% overseas, directly driving Australian dollar demand.
The Australian dollar is an offensive product that does not need hedging for local investors
The foreign exchange hedging ratio of Australian investors (especially pensions) to overseas risky assets is generally low (about 1/5). The core reason is that the Australian dollar has a lot of money.However, the hedging attributes and the cost-effectiveness of hedging benefits and costs do not support high proportion hedging.
Natural hedging effect: The Australian dollar is a risk-oriented currency (the global economy is weak and depreciates), and the US dollar is a safe-haven currency" (the global economy is weak and appreciates), while overseas stocks (such as US stocks) are positively correlated with the global economy - so when the US stock market falls, the Australian dollar depreciates against the US dollar, which can offset some of the losses of overseas capital, that is, when the losses of the US stock market fall, the Australian dollar can still be exchanged for more Australian dollars due to the depreciation of the Australian dollar.
Australia volatility is lower: In recent years, the Australian dollar volatility is lower than the volatility of the return of overseas stocks, and exchange rate volatility accounts for a small proportion of the overall portfolio volatility, reducing the necessity of explicit hedging.
Hedging cost non-dominant factors: Unlike the Japanese yen (high hedging cost eouu.cnes from interest rate differences), Australia's hedging Cost is not the dominant factor, but derivatives themselves have costs and need to cover returns, further curbing high hedging demand.
Foreign exchange demand for Australian pensions will help stabilize the Australian dollar value
In the long run, the foreign exchange hedging scale of Australian pensions will increase significantly, due to the three major trends of asset expansion, increase in overseas share, and investment towards fixed income; this growth will bring new challenges such as "reverse diversification" and "liquidity management".
Total asset expansion: Total pension assets will rise from 150% of GDP to 180% (the next decade); overseas share increases: Due to limited domestic assets, the proportion of overseas investment will further increase.
Asset structure shifts: Member aging drives the portfolio from stocks (Low hedging) to fixed income (high hedging due to the difference in earnings pattern and correlation).
Asset expansion alone may double the current hedging portfolio of about AUD 500 billion in the next decade. The impact of pension hedging is a secondary but not neglected structural factor, mainly affecting the stability of the exchange rate rather than the long-term trend direction, helping to maintain the low volatility of the Australian dollar.
The attitude of the Australian Federal Reserve
The Bank of Australia lowered its benchmark interest rate for the third time this year after taking rate cuts in February and May this year. The current interest rate is 3.6%. The Australian August employment report to be released on Thursday will become a key basis for the country's central bank's subsequent decisions. Although employment increased by 25,000 in July, in recent months Employment growth has been slightly weak. The market expects that the growth rate of about 20,000 people will continue this time, keeping the unemployment rate at 4.2%. Hogan added that given the improvement of consumption data and the rebound of some inflation indicators, if the unemployment rate starts to decline again, the RBA may postpone the original interest rate cut plan in November, which will push up the exchange rate between the Australian dollar and the US dollar.
Core conclusion: eouu.cnmodity attributes are good for the Australian dollar to continue to appreciate
In the short term, the logic of the low hedging cost of the Australian dollar has not been broken, and there is no sign of an end to the dollar hedging. The Australian dollar is still an effective natural hedging tool for global risk assets, and the hedging cost is relatively low, and there is no fundamental paradigm shift.
The Australian dollar's eouu.cnmodity export attributes make it highly for global economic growthSensitive, while the rise in global stock markets usually reflects the improvement of economic prosperity and the recovery of risk appetite, which will drive eouu.cnmodity demand and prices to rise, thereby providing continuous upward support for the Australian dollar.
Under this background, the Australian dollar is expected to continue its relatively strong operating trend. For local investors, stable currency value and low hedging costs are both the advantages of the Australian dollar itself.
The above content is about "[XM Foreign Exchange Market Review]: Why is Australia's 11th GDP firmly in the top 6 foreign exchange market? The Australian dollar can still rise in the short term!", which was carefully eouu.cnpiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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