5308.0 - Foreign Currency Exposure, Australia, March Quarter 2009  
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 30/10/2009   
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ANALYSIS AND COMMENTS


FOREIGN CURRENCY EXPOSURE

Table 1

At 31 March 2009, Australian resident enterprises had a net long foreign currency exposure of $388.1b after taking account of hedging through the use of derivative contracts and natural hedging of foreign currency assets and liabilities. This is an increase of $170.5b on the 31 March 2005 exposure.

The foreign currency balance sheet exposure at 31 March 2009 was a net long position of $43.7b, a decrease of $48.2b on 31 March 2005. Foreign equity assets increased $113.0b, foreign currency denominated debt assets increased $212.0b and foreign currency denominated debt liabilities increased $363.2b.

The foreign currency exposure including expected future foreign currency denominated receipts and payments from trade in goods and services, but before hedging, at 31 March 2009 was a net long position of $100.6b, an increase of $4.8b on the 31 March 2005 exposure.

The primary contributors to the increased net exposure after hedging compared with 31 March 2005 were an increase of $113.0b in foreign equity assets and an increase of $53.0b in the difference between expected future foreign currency receipts and payments. As discussed below, these financial instruments tend to be hedged only to a limited extent.

Consistent with the 2001 and 2005 surveys, the 2009 survey shows that the net long foreign currency exposure after hedging is greater than the exposure before hedging. As discussed below, this is largely explained by the fact that hedging policies vary across different asset classes.


FOREIGN CURRENCY EXPOSURE BY SECTOR

Table 2

Banks had a net short foreign currency exposure before hedging of $316.6b, an increase of $164.1b on the net short position of $152.5b at 31 March 2005. This is primarily due to a significant increase in foreign currency denominated debt liabilities. After hedging, banks had a net long foreign currency exposure of $37.9b.

The RBA had a net long foreign currency exposure before hedging of $43.9b, approximately the same as at 31 March 2005. After hedging, the RBA had a net long foreign currency exposure of $43.3b, an increase of $20.9b on the net long position at 31 March 2005.

Other financial corporations had a net long foreign currency exposure before hedging of $221.3b, an increase of $107.6b on the net long position of $113.7b in 2005. After hedging, this was reduced to a net long foreign currency exposure of $154.0b, an increase of $55.5b on the net long position of $98.5b at 31 March 2005.

Central borrowing authorities and general government had a net long foreign currency exposure before hedging of $6.6b, by comparison with a net short position of $3.3b at 31 March 2005. After hedging, the foreign currency exposure was reduced to a net long foreign currency position of $3.1b at 31 March 2009.

Other resident sectors had a net long foreign currency exposure before hedging of $145.4b, an increase of $48.8b on the net long position of $96.6b in 2005. The increase is primarily due to an increase in the difference between expected future receipts and payments from trade reported by this sector. After hedging, the exposure was $149.8b, an increase of $51.3b on the net long position of $98.5b at 31 March 2005.


FOREIGN CURRENCY EXPOSURE OF ASSETS AND LIABILITIES BY CURRENCY

Table 3

The United States dollar accounted for $234.7b of the total foreign equity assets of $456.7b. This represents 51% of the total compared with 52% at 31 March 2005. The New Zealand dollar, which has been presented explicitly for the first time in this survey, accounted for $27.7b, or 6% of the total.

The United States dollar accounted for $263.4b of the total foreign currency denominated debt assets of $415.7b. This represents 63% of the total compared with 52% at 31 March 2005. The New Zealand dollar accounted for $29.8b, or 7% of the total.

The United States dollar accounted for $491.6b of the total foreign currency denominated debt liabilities of $828.7b. This represents 59% of the total compared with 53% at 31 March 2005. The New Zealand dollar accounted for $21.4b, or 3% of the total.


DERIVATIVES HEDGING

Table 8

Forward foreign exchange contracts accounted for $729.9b of the total $1544.6b of derivative contracts involving the purchase of foreign currencies and the sale of Australian dollars. This represents 47% of the total compared to 61% at 31 March 2005.

Cross currency interest rate swaps accounted for $621.0b of the total $1544.6b of derivative contracts involving the purchase of foreign currencies and the sale of Australian dollars. This represents 40% of the total compared to 27% at 31 March 2005.

This indicates a significant switch away from the use of forward foreign exchange contracts in favour of cross currency interest rate swaps.

Forward foreign exchange contracts accounted for $749.0b of the total $1257.1b of derivative contracts involving the sale of foreign currencies and the purchase of Australian dollars. This represents 60% of the total compared to 67% at 31 March 2005.

Cross currency interest rate swaps accounted for $348.8b of the total $1257.1b of derivative contracts involving the sale of foreign currencies and the purchase of Australian dollars. This represents 28% of the total compared to 18% at 31 March 2005.

Again, this indicates a significant switch away from the use of forward foreign exchange contracts in favour of cross currency interest rate swaps.


Table 2

The difference between derivatives involving the purchase of foreign currencies and the sale of foreign currencies was a net long position of $287.5b. Reflecting their predominant role as intermediaries in the foreign currency derivatives markets, banks account for 82% of derivatives involving the purchase of foreign currencies and 73% of derivatives involving the sale of foreign currencies.


EXPECTED FUTURE FOREIGN CURRENCY DENOMINATED RECEIPTS AND PAYMENTS FROM TRADE

Table 6

Expected future foreign currency denominated receipts from exports were $269.2b, while expected future foreign currency denominated payments for imports were $212.3b. The net foreign currency exposure represented by the difference between receipts and payments was $56.9b, an increase of $53.0b on the difference of $3.9b at 31 March 2005.

The increase in the net foreign currency exposure is partly due to the increased coverage of exporters and importers in the 2009 survey compared with the 2005 survey. Note that the 2009 results have omitted the 'greater than 5 years' time horizon. Refer to paragraphs 2 and 4 of the Explanatory Notes.


HEDGING POLICY AND PRACTICE

Survey respondents were asked to provide qualitative information on their approach to hedging foreign currency assets and liabilities with derivatives. These responses, together with discussions undertaken during the editing phase of the survey, indicate that the approach to hedging varies significantly across different financial instruments.


Table 14

Foreign currency debt liabilities are largely hedged, with 65% of reported debt liabilities fully hedged and a further 16% hedged under partial hedging strategies with an average level of hedging of 91%.


Table 12

Foreign currency debt assets have a more modest level of hedging, with 32% of reported debt assets fully hedged. 63% of foreign currency debt assets are reported as having no hedging using derivatives, though there is likely to be a degree of natural hedging of foreign currency debt assets and liabilities. Overseas bond portfolios of funds managers and superannuation funds account for the bulk of foreign currency debt assets that are fully hedged.


Table 10

There is relatively little hedging of foreign direct equity assets, which are generally non-resident branches and subsidiaries of Australian parent companies, or non-resident companies that are part-owned by Australian companies. 70% of direct equity assets are reported as having no hedging using derivatives. 19% are hedged under partial hedging strategies with an average level of hedging of 39%.


Table 11

Foreign portfolio equity assets, which are predominantly the overseas equities portfolios of funds managers and superannuation funds, tend to be partially hedged. 68% of portfolio equity assets are reported as partially hedged with an average level of hedging of 47%, and further 14% are reported as fully hedged.


Tables 13, 15

There is comparatively little hedging of expected future foreign currency receipts and payments from trade in goods and services. Taking into account the average level of hedging under partial hedging strategies only 16% of receipts and 25% of payments either fully hedged or hedged through partial hedging strategies. Discussions with respondents during the editing phase of the survey suggest that near term payments and receipts are more likely to be hedged, with the level of hedging reducing progressively over the time horizon.


SUMMARY

Overall, the reported net exposure of $388.1b appears largely due to equity assets and net foreign currency receipts that are largely unhedged.

Different hedging policies across different financial instruments also explains why the net exposure after hedging is greater than the net exposure before hedging. The net exposure at an aggregate level reflects a natural hedge between foreign currency assets and liabilities that does not appear to be a prime consideration in hedging decisions at the level of the individual enterprise.

Though not formally tabulated in this survey, it appears that hedging by foreign-owned entities is sometimes managed centrally by the parent company, in which case this is unlikely to involve hedging back into the Australian dollar. Changes in the level of business activities of Australian branches and subsidiaries of non-resident parents may therefore have an effect on the measured foreign currency exposure of Australian residents. The same may also be true for Australian resident parent companies that hedge the foreign currency exposure of branches and subsidiaries centrally.