Notwithstanding the downbeat prognosis for most of the world’s major economies, the Aussie continues to defy the doubters. Overnight the AUD reached an 11-week high of 1.04; just a week ago it was looking decidedly shaky down near 1.01. Earlier this week the Aussie achieved a record low against the euro of just below 1.19. It remains around the 1.50 level against the pound, a decent performance considering that sterling has been one of the better currencies in 2012.
In the last few days a couple of developments have provided the Aussie with some fresh buoyancy. After an extensive review lasting almost three years, the Bundesbank has relented and will add Australian dollar-denominated assets to its reserves. In addition, the Australian Financial Review has reported that the central bank of the Czech Republic also vowed to invest in Aussie assets because of concerns over the euro. This has been a common theme this year – numerous sovereign wealth funds and FX reserve managers have been increasing their allocation to the Australian dollar.
Indeed, such has been the Aussie’s resilience in 2012 that it is behaving less like a high-beta currency. For instance, the chart shows that the Aussie has really decoupled from the MSCI Emerging Asia equities index over the last couple of months. Much of the explanation for the breakdown of this high correlation between high-beta assets and the Aussie recently lies with the active diversification out of the euro by sovereign wealth funds, money managers and high net worth investors. This process of bailing out of the euro probably still has some way to go. As a result, this much-reduced correlation of the Aussie to high-beta assets may well continue for a while longer.