Over the past year, investors continued to look around the world for higher levels of income potential. For some, the decision to allocate to the debt of Australia and New Zealand in 2012 resulted in strong performance compared to U.S. Treasuries.1
But individual investors were not the only market participants looking to diversify their holdings internationally. In fact, central bankers around the world have long allocated a portion of their foreign exchange reserves to Australian assets (such as government bonds).
But in the coming months, the International Monetary Fund (IMF) is expected to publish central bank holdings of the Australian dollar (as well as the Canadian dollar) as part of its official Currency Composition of Official Foreign Exchange Reserves (COFER) database for the first time. This move will add the Australian dollar to the current list of “reserve” currencies: U.S. dollar, euro, British pound, Japanese yen and Swiss franc.
While this doesn’t necessarily create a catalyst for investment, it does validate the perceived strength and stability of Australia’s currency and financial system by global decision makers. Indeed, the term “reserve currency” stems from these government holdings (such as bonds) being held as reserves at central banks around the world.
Taking the interpretation a step further, in the eyes of these government officials, the Australian dollar could increasingly be viewed as a long-term store of value. [Australian Dollar ETF Testing Resistance]