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Forex Flash: AUD inflows cooling amidst saturation – UBS

The Australian dollar has benefitted enormously from portfolio inflows since the Global Financial Crisis receded in 2009. The currency got a second wind when the Eurozone debt crisis flared up, which triggered a cascade of sovereign rating downgrades and enhanced the appeal of the handful of remaining AAA sovereigns. However, these inflows are now starting to cool somewhat, given that the foreign holdings of commonwealth bonds (issued by the Federal government) have already reached saturation point.

That said, “Over-bearishness on the currency is not justified in our view as a sudden reversal of previous inflows seems unlikely. After all, reserve managers were behind much of the AUD buying and their long-term investment horizons suggest this was a structural shift into Australian assets.” suggests Research Analyst Gareth Berry at UBS.

Moreover, in looking beyond the confines of the commonwealth bond market, a broader range of Australian assets is still seeing inflows – even if this buying has slowed somewhat too. Domestic Australian investors are becoming more adventurous overseas, but their outflows so far are still no match for foreigner inflows.

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