Euro gives $A more clout
By Andreea Papuc
The Australian dollar is poised to become more dominant
in international foreign exchange markets after the
introduction of Europe's new currency, the euro, on
January 1.
Already the $A is the world's eighth most traded
currency, and the launch of the euro could catapult it into
fifth place, behind the US dollar, euro, yen, and sterling,
HSBC Markets has predicted.
The Reserve Bank Governor, Mr Ian Macfarlane, agrees
that the move to the euro will create more interest in the
Australian currency.
He noted on Friday that intra-European diversification of
portfolios in European countries would disappear with
the euro. "I could imagine that big French and German
funds could then start to look towards Australia," he said.
The head of foreign exchange at Deutsche Bank, Mr Ian
Town, agrees. "In terms of active, liquid markets, the $A
will clearly look more attractive from a portfolio
diversification perspective," he said.
Banks are reporting a sharp increase in interest to trade
the $A in London and New York, the world's largest
currency markets, in the last six months.
Global investment banks are reorganising their dealing
rooms to meet increasing demand for the $A. For
example Chase Manhattan's deutschemark/lira trader in
London is now the $A trader, Goldman Sachs has
started making markets in the $A out of Hong Kong and
Bank of America out of Singapore.
Deutsche Bank did not quote the $A in the London
professional market until 18 months ago.
"The $A seems to be globalising. We will see an increase
in $A activity," Mr Town said. "We are already seeing an
increase in market makers."
Even without the euro, $A trading was on a rising tide.
With an estimated average daily turnover of $60 billion in
global forex markets, trading is 50 per cent higher than it
was four years ago.
When euro exchange rates are irrevocably fixed on
January 1, an estimated 14 per cent of global foreign
exchange trading will be wiped out.
"With the euro, what you need to remember is people
like to trade liquid, freely floating currencies," the head of
foreign exchange at Bankers Trust, Mr Lucio Febo, said.
"If you look around the world, you will end up with the
sterling, the euro and a few other smaller European
currencies, the yen, the US dollar, the aussie, the kiwi
and maybe to a certain extent the Singapore dollar."
The chief dealer of foreign exchange at Chase
Manhattan, Mr David Campbell said: "As you go into
euro, you've got basically an excess of dealers, so what
we've seen now is people . . . looking at new markets to
go into and Australia has become one of the markets of
choice, and New Zealand, because they offer relative
liquidity, relatively sophisticated financial markets, there's
a good swap market, a good futures market."
Market participants expect the upcoming Bank of
International Settlements survey, compiled every three
years, to confirm an increase in $A trading in international
markets.
"I would expect certainly in calendar 1999 for the $A to
become much more liquid in the London and New York
time zones," a fixed income strategist at ABN AMRO,
Mr Peter Clay, said.
Driving this demand are European money managers who
will seek to diversify their risk when the interest rates of
the 11 single European currency founding countries
converge.
Westpac's London-based economist, Mr James Shugg,
said that funds under management in Europe were
growing at a dramatic rate.
At the same time, bond yields across Europe have
converged in the lead-up to the euro.
"For the risk takers, those that are prepared to hunt out
more attractive opportunities, it's a very boring market
now," Mr Shugg said.
"So what they've started to do over the last couple of
years is look further afield, particularly to dollar block
markets and that's certainly been to Australia's benefit."
Although Australian bond yields have come down, the
market here is considered high-yielding compared with
Europe.
Westpac has witnessed an increase in interest in Australia
across Europe. Scandinavian funds have already invested
in $A-denominated assets, while the core European
markets, such as France, have been more reluctant, but
are now starting to look more aggressively offshore.
"I can assure you that compared to say two or three
years ago, knowledge of the Australian bond market on
behalf of a lot of players around Europe is improving and
they are prepared to listen to banks like us when we
want to talk about Australia, whereas perhaps in the past,
they were more focused on Europe," Mr Shugg said.
afr.com.au
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