Why is Australia, despite having the 11th-highest GDP, still firmly in the top 6 of the foreign exchange market? Could the Australian dollar still rally in the short term?
2025-09-16 16:26:03
On Tuesday (September 16), the Australian dollar (AUD) fell slightly against the US dollar, falling 0.06% to around 0.6664. The Australian dollar has recently strengthened, buoyed by the upcoming Federal Reserve interest rate decision and continued buoyancy in global equity markets. The Australian dollar holds a unique position in the global foreign exchange market, enjoying a fully free-floating exchange rate system, high market influence, and stable value. This advantage stems from three factors. Combined with its commodity nature and the positive impact of the global economic recovery, the Australian dollar is expected to continue its upward trend in the short term.
The Australian dollar's position in the global foreign exchange market far exceeds the size of Australia's economy (GDP ranking 11th vs. foreign exchange trading volume ranking 6th), and it is the only currency among the top ten currencies to have both a fully free floating exchange rate system and high influence. Among the top ten currencies, no other currency can achieve such a high level of excess influence while implementing a fully free floating exchange rate system.
The Australian dollar has the attribute of a commodity exporter and is sensitive to global growth. Australian dollar assets have become a currency asset for investors to go long to gain risk-taking exposure, or to hedge risks through short selling.
Finally, Australia's retirement savings assets are ranked fourth in the world (equivalent to 150% of GDP), 50% of which are invested overseas. In the next ten years, this will rise to second in the world (accounting for 180% of GDP), with overseas holdings accounting for nearly 75%, which will directly drive demand for the Australian dollar.
Australian investors (especially pension funds) generally have a low foreign exchange hedging ratio for overseas risky assets (about 1/5). The core reason is that the Australian dollar has natural hedging properties, and the cost-effectiveness of hedging income and costs does not support high-ratio hedging.
Natural hedging effect: The Australian dollar is a risk-on currency (it depreciates when the global economy weakens), while the US dollar is a safe-haven currency (it appreciates when the global economy weakens). Overseas stocks (such as US stocks) are positively correlated with the global economy. Therefore, when US stocks fall, the Australian dollar depreciates against the US dollar, which can offset some of the overseas capital losses. That is, when losses from the decline in US stocks are converted back to Australian dollars, due to the depreciation of the Australian dollar, more Australian dollars can still be exchanged for.
Lower Australian dollar volatility: In recent years, the volatility of the Australian dollar has been lower than that of overseas stock returns. Exchange rate fluctuations account for a small proportion of overall portfolio volatility, reducing the need for explicit hedging.
Hedging costs are not a dominant factor: Unlike the Japanese yen (where high hedging costs stem from interest rate differentials), hedging costs are not a dominant factor in Australia. However, derivatives themselves have costs that need to be covered by returns, further suppressing high hedging demand.
In the long run, the scale of foreign exchange hedging of Australian pension funds will increase significantly due to three major trends: asset expansion, increased overseas share, and investment in fixed income; this growth will bring new challenges such as "counterparty diversification" and "liquidity management".
Expansion of total assets: Total pension assets will increase from 150% of GDP to 180% (in the next ten years); Increased overseas share: Due to limited domestic assets, the proportion of overseas investment will further increase.
Shift in asset structure: Aging members are driving the portfolio from stocks (low hedge) to fixed income (high hedge, due to differences in return patterns and correlations).
Asset expansion alone could double the current hedge portfolio of approximately A$500 billion over the next decade. The impact of pension hedging is a secondary but significant structural factor, primarily affecting exchange rate stability rather than long-term trend direction, helping to maintain the low volatility of the Australian dollar.
The Reserve Bank of Australia (RBA) lowered its benchmark interest rate for the third time this year, following previous rate cuts in February and May. The current rate is 3.6%. Australia's August employment report, released on Thursday, will be a key factor in the central bank's subsequent decisions. Although employment increased by 25,000 in July, job growth has weakened slightly in recent months. Market expectations are for a continuation of this increase of approximately 20,000, keeping the unemployment rate at 4.2%. Hogan added that given improving consumer data and a rebound in some inflation indicators, if the unemployment rate begins to decline again, the RBA may postpone its planned November rate cut, which would push up the Australian dollar against the US dollar.
In the short term, the Australian dollar's low hedging cost logic remains intact, and there's no sign of an end to US dollar hegemony. The Australian dollar remains an effective natural hedge against global risk assets, with relatively low hedging costs, indicating no fundamental paradigm shift.
The Australian dollar's commodity export attributes make it highly sensitive to global economic growth. Rising global stock markets usually reflect improved economic prosperity and a rebound in risk appetite, which will drive up demand and prices for commodities, thereby providing continued upward support for the Australian dollar.
Against this backdrop, the Australian dollar is expected to continue its relatively strong performance. For local investors, the stable currency and low hedging costs are the inherent advantages of the Australian dollar.
(AUD/USD daily chart, source: Yihuitong)
At 16:20 Beijing time, the Australian dollar was trading at 0.6667/68 against the US dollar.
The Australian dollar holds a unique position in the global foreign exchange market
The Australian dollar's position in the global foreign exchange market far exceeds the size of Australia's economy (GDP ranking 11th vs. foreign exchange trading volume ranking 6th), and it is the only currency among the top ten currencies to have both a fully free floating exchange rate system and high influence. Among the top ten currencies, no other currency can achieve such a high level of excess influence while implementing a fully free floating exchange rate system.
The Australian dollar has the attribute of a commodity exporter and is sensitive to global growth. Australian dollar assets have become a currency asset for investors to go long to gain risk-taking exposure, or to hedge risks through short selling.
Finally, Australia's retirement savings assets are ranked fourth in the world (equivalent to 150% of GDP), 50% of which are invested overseas. In the next ten years, this will rise to second in the world (accounting for 180% of GDP), with overseas holdings accounting for nearly 75%, which will directly drive demand for the Australian dollar.
The Australian dollar is an aggressive asset that does not require hedging for local investors.
Australian investors (especially pension funds) generally have a low foreign exchange hedging ratio for overseas risky assets (about 1/5). The core reason is that the Australian dollar has natural hedging properties, and the cost-effectiveness of hedging income and costs does not support high-ratio hedging.
Natural hedging effect: The Australian dollar is a risk-on currency (it depreciates when the global economy weakens), while the US dollar is a safe-haven currency (it appreciates when the global economy weakens). Overseas stocks (such as US stocks) are positively correlated with the global economy. Therefore, when US stocks fall, the Australian dollar depreciates against the US dollar, which can offset some of the overseas capital losses. That is, when losses from the decline in US stocks are converted back to Australian dollars, due to the depreciation of the Australian dollar, more Australian dollars can still be exchanged for.
Lower Australian dollar volatility: In recent years, the volatility of the Australian dollar has been lower than that of overseas stock returns. Exchange rate fluctuations account for a small proportion of overall portfolio volatility, reducing the need for explicit hedging.
Hedging costs are not a dominant factor: Unlike the Japanese yen (where high hedging costs stem from interest rate differentials), hedging costs are not a dominant factor in Australia. However, derivatives themselves have costs that need to be covered by returns, further suppressing high hedging demand.
Australian pension fund foreign exchange demand helps stabilize the Australian dollar
In the long run, the scale of foreign exchange hedging of Australian pension funds will increase significantly due to three major trends: asset expansion, increased overseas share, and investment in fixed income; this growth will bring new challenges such as "counterparty diversification" and "liquidity management".
Expansion of total assets: Total pension assets will increase from 150% of GDP to 180% (in the next ten years); Increased overseas share: Due to limited domestic assets, the proportion of overseas investment will further increase.
Shift in asset structure: Aging members are driving the portfolio from stocks (low hedge) to fixed income (high hedge, due to differences in return patterns and correlations).
Asset expansion alone could double the current hedge portfolio of approximately A$500 billion over the next decade. The impact of pension hedging is a secondary but significant structural factor, primarily affecting exchange rate stability rather than long-term trend direction, helping to maintain the low volatility of the Australian dollar.
The Reserve Bank of Australia's stance
The Reserve Bank of Australia (RBA) lowered its benchmark interest rate for the third time this year, following previous rate cuts in February and May. The current rate is 3.6%. Australia's August employment report, released on Thursday, will be a key factor in the central bank's subsequent decisions. Although employment increased by 25,000 in July, job growth has weakened slightly in recent months. Market expectations are for a continuation of this increase of approximately 20,000, keeping the unemployment rate at 4.2%. Hogan added that given improving consumer data and a rebound in some inflation indicators, if the unemployment rate begins to decline again, the RBA may postpone its planned November rate cut, which would push up the Australian dollar against the US dollar.
Core conclusion: Commodity attributes are conducive to the continued appreciation of the Australian dollar
In the short term, the Australian dollar's low hedging cost logic remains intact, and there's no sign of an end to US dollar hegemony. The Australian dollar remains an effective natural hedge against global risk assets, with relatively low hedging costs, indicating no fundamental paradigm shift.
The Australian dollar's commodity export attributes make it highly sensitive to global economic growth. Rising global stock markets usually reflect improved economic prosperity and a rebound in risk appetite, which will drive up demand and prices for commodities, thereby providing continued upward support for the Australian dollar.
Against this backdrop, the Australian dollar is expected to continue its relatively strong performance. For local investors, the stable currency and low hedging costs are the inherent advantages of the Australian dollar.
(AUD/USD daily chart, source: Yihuitong)
At 16:20 Beijing time, the Australian dollar was trading at 0.6667/68 against the US dollar.
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