Gaining currency: why global investors and market participants adore the Aussie Dollar

It’s no secret global investors have a deep affinity with the Australian dollar.

“A weaker AUD generally benefits exporters, as they receive payments in foreign currencies that they can convert to AUD at favourable rates compared to previous years.”

According to the Bank for International Settlements, the Australian dollar (AUD) accounted for 6.4 per cent of global foreign exchange turnover.

This places it as the sixth most traded currency, following the US dollar (USD), euro (EUR), yen (JPY), British pound (GBP), and renminbi (RMB).

The AUD's high trading volume stems from Australia’s strategic economy, commodity links, open and stable financial markets, and regional liquidity.

Developed financial sector

Australia's advanced financial markets bolster the liquidity of the AUD.

As of October 2024, the Australian market witnessed an average daily turnover of USD175.3 billion in over-the-counter foreign exchange (FX) instruments, reflecting strong trading activity and investor confidence in AUD-denominated assets.

Australia has an open capital account, enabling free capital flow across borders. This, combined with a developed financial sector, draws foreign investments in government bonds and real assets, leading to high AUD transaction turnover in global FX markets.

Bridging Europe and North America

Australia's time zone plays a vital role in bridging the gap between North American and European trading sessions.

During Asian trading hours, the AUD is one of the most liquid and actively traded currencies, acting as a regional benchmark in the Asia-Pacific region.

It provides necessary liquidity to regional market participants, including central banks, corporations and institutional investors.

Central banks and institutional investors use the AUD in their foreign currency reserves and global portfolios for diversification.

As a developed-market currency outside the USD, EUR, JPY, GBP, it offers exposure to commodity markets and Asia-Pacific without the geopolitical risks associated with emerging market.

The International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) data indicate that the AUD accounts for approximately 2 per cent of global foreign currency reserves, which is notable given the size of Australia's economy..

The Reserve Bank of Australia (RBA) seldom intervenes in the foreign exchange market, as the market has become more sophisticated over time. This fosters confidence among international traders that the value of the AUD reflects genuine market dynamics.

Predictability

The availability of sophisticated risk management tools in the derivatives market – including futures, forwards, swaps and options, traded either over the counter or on exchanges – has facilitated access, establishing the AUD as a preferred currency for hedging or speculation.

The RBA operates within a well-defined inflation-targeting framework, characterised by its longstanding independence and credibility. Market participants appreciate policy predictability, which mitigates risks and facilitates efficient price discovery in the AUD.

Australia ranks highly for ease of doing business and rule of law. This lowers the sovereign risk premium, making the AUD more attractive for holding and trading than currencies from similarly sized economies with less stable governance.

Commodity exposure

Outside the structural drivers, market-based factors also support global demand for the AUD. It is a commodity-linked currency, reflecting Australia's exports of iron ore, coal and liquefied natural gas.

It serves as a proxy for commodity exposure, especially to demand from China. And it is affected by changes in Australia’s terms of trade, making it a tool for expressing views on global commodity cycles.

In 2023-24, Australia's goods and services exports totalled AUD659.4 billion, with key commodities like iron ore (20.9 per cent), coal (13.9 per cent) and natural gas (10.4 per cent). Most exports go to Asian markets, notably China, which accounted for about 32 per cent of Australia's total exports in 2023. Australia's economic ties with Asia, particularly China, also influence the AUD's trading volume.

Fluctuation

The AUD/USD has fluctuated between 0.59-0.65 this year, which is a notably lower boundary for the AUD in terms of historical levels.

A weaker AUD generally benefits exporters, as they receive payments in foreign currencies that they can convert to AUD at favourable rates compared to previous years.

Additionally, a weaker AUD attracts tourism into Australia, thereby supporting local businesses. However, the disadvantage is that Australians find it more expensive to travel overseas.

Mahjabeen Zaman is Head of FX Research with ANZ Institutional