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A new research note released by Bank of America Merrill Lynch Research has exposed just how popular the Australian dollar has become on international foreign exchange markets.

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The best universally recognised source of information concerning turnover in the foreign exchange markets is the Bank of International Settlements Triennial Survey - the last of which was released in April 2010.

In order to gauge FX volumes, and with a dearth of quality data since then, Bank of America Merrill Lynch have utilised the more frequent (semi-annual) surveys published by FX committees in the major trading centers –UK, US and Singapore.

The banks research has shown that in October 2011, AUD-USD leapfrogged both USD-JPY and GBP-USD to become the second most traded spot currency pair in the US after EUR/USD.

In the UK, it became the third most traded currency, with its share just 0.6ppt shy of cable in second place.

The demand for the Australian dollar is significant relative to the increase in overall FX volumes, with the share of AUD rising by 3ppt to over 10% of overall transactions.

Both the moves are unprecedented and unlikely to be fully explained by the market volatility in 3Q last year, which would have affected overall volumes too.

Bank of America Merrill Lynch conclude:

"The increase in offshore AUD/USD turnover presents both benefits and risks, but if it has been primarily driven by carry-trade flows, the benefits from greater liquidity can quickly disappear if fundamental issues (China growth concerns) or “extreme” risk events (intensification of Eurozone crisis) arise, as well as if there is any further back-up in G4 yields.

"We maintain our view that levels just below parity represent a fundamentally “fair” value for AUD/USD, while cognisant of the fact that some of the carry and reserve flow support for the currency needs to diminish before we reach there."