This document was added or updated on 08/11/2017.
ANALYSIS AND COMMENTS
FOREIGN CURRENCY EXPOSURE
Table 1
At 31 March 2017, Australian resident enterprises had a net long (footnote 1) foreign currency exposure of $1061.1b after taking account of hedging through the use of derivative contracts. This is an increase of $374.7b (55%) on the 31 March 2013 exposure of $686.4b.
The foreign currency balance sheet exposure at 31 March 2017 was a net long position of $776.8b, an increase of $438.5b on 31 March 2013. Foreign equity assets increased $458.5b, while foreign currency denominated debt assets increased $639.9b and foreign currency denominated debt liabilities increased $660.0b.
The foreign currency exposure including expected future foreign currency denominated receipts and payments from trade in goods and services, but before derivative holdings, at 31 March 2017 was a net long position of $808.6b. This is an increase of $275.5b on the 31 March 2013 exposure.
FOREIGN CURRENCY EXPOSURE BY SECTOR
Table 2
The Banks sector had a net short (footnote 2) foreign currency exposure before derivative holdings of $239.8b, a decrease of $45.6b on the net short position of $194.2b at 31 March 2013. This was driven by an increase across all components in the balance sheet. After derivative holdings, banks had a net long foreign currency exposure of $54.7b, a decrease of $11.4b on the net long position of $66.1b at 31 March 2013.
The RBA sector had a net long foreign currency exposure before derivative holdings of $76.0b, an increase of $37.4b on the net long position of $38.6b at 31 March 2013. After derivative holdings, the RBA sector had a net long foreign currency exposure of $52.5b, an increase of $8.1b on the net long position of $44.4b at 31 March 2013.
The Other financial corporations sector had a net long foreign currency exposure before derivative holdings of $646.8b, an increase of $309.8b on the net long position of $337.0b at 31 March 2013. This was primarily driven by a $184.2b increase in foreign equity assets and a $107.9b increase in foreign currency denominated debt assets. After derivative holdings, other financial corporations had a net long foreign currency exposure of $523.0b, an increase of $322.7b on the net long position of $200.3b at 31 March 2013.
Central borrowing authorities and general government sector had a net long foreign currency exposure before derivative holdings of $51.6b, a turnaround of $58.7b on the net short position of $7.1b at 31 March 2013. After derivative holdings, central borrowing authorities and general government had a net long foreign currency position of $26.2b at 31 March 2017, a turnaround of $57.1b on the net short position of $30.9b at 31 March 2013.
Other resident sectors had a net long foreign currency exposure before derivative holdings of $273.9b, a decrease of $84.9b on the net long position of $358.8b at 31 March 2013. After derivative holdings, Other resident sectors had a net long foreign currency exposure of $404.6b, a decrease of $1.9b on the net long position of $406.5b at 31 March 2013.
FOREIGN CURRENCY EXPOSURE OF ASSETS AND LIABILITIES BY CURRENCY
Table 3
The United States dollar accounted for $494.4b of the total foreign equity assets of $1,127.8b. This represents 44% of the total compared with 42% at 31 March 2013. This was followed by the Other currency group(footnote 3), accounting for $374.4b, or 33% of the total.
The United States dollar accounted for $672.2b of the total foreign currency denominated debt assets of $1027.1b. This represents 65% of the total compared with 59% at 31 March 2013. The Other currency group accounted for $123.7b, or 12% of the total.
The United States dollar accounted for $949.5b of the total foreign currency denominated debt liabilities of $1378.2b, representing 69% of the total compared with 67% at 31 March 2013. The Euro accounted for $159.5b, or 12% of the total.
FOREIGN CURRENCY ASSETS AND LIABILITIES BY INSTRUMENT
Table 7
Loans accounted for $453.1b of the total foreign currency denominated debt assets of $1027.1b, representing 44% of the total. Other debt assets accounted for $255.3b, or 25% of the total.
Long-term debt securities accounted for $463.6b of the total foreign currency denominated debt liabilities of $1378.2b, representing 34% of the total. Loans accounted for $356.4b, or 26% of the total.
VALUE HEDGED AND MATURITY MATCHING FOR SHORT AND LONG-TERM DEBT SECURITY LIABILITIES
Tables 8, 10 and 11
Total foreign currency denominated short-term debt security liabilities currently owed by Australian entities was $149.4b at 31 March 2017. Of this total, $110.0b, or 74% was hedged, of which $98.9b was maturity matched.
Total foreign currency denominated long-term debt security liabilities currently owed by Australian entities was $463.6b at 31 March 2017. Of this total, $381.1b, or 82% was hedged, of which $316.7b was maturity matched.
This position is predominantly made up of securities with a maturity of 'greater than 1 year but less than or equal to 5 years', which accounted for $244.1b, or 53% of the total long-term debt securities. Of these securities, $205.1b (84%) was hedged, with $187.5b maturity matched.
EXPECTED FUTURE FOREIGN CURRENCY DENOMINATED RECEIPTS AND PAYMENTS FROM TRADE
Table 12
Expected future foreign currency denominated receipts from exports were $414.1b, while expected future foreign currency denominated payments for imports were $382.3b. The net foreign currency exposure represented by the difference between receipts and payments was $31.8b.
DERIVATIVES HEDGING
Tables 14 and 15
Cross currency interest rate swaps accounted for $1411.3b (69%) of the total $2054.2b of derivative contracts involving the purchase of foreign currencies and the sale of Australian dollars. This was an increase of $477.5b on the 31 March 2013 result of $933.8b.
Forward foreign exchange contracts accounted for $572.9b (28%) of the total $2054.2b of derivative contracts involving the purchase of foreign currencies and the sale of Australian dollars. This was an increase of $185.1b on the 31 March 2013 result of $387.8b.
At March 31 2017, of the total $2054.2b, Banks accounted for $1476.1b (72%) of derivative contracts involving the purchase of foreign currencies and the sale of Australian dollars. This was an increase of $258.7b on the principal value of $1217.4b reported by Banks at 31 March 2013.
Cross currency interest rate swaps accounted for $1,045.7b (58%) of the total $1,801.7b of derivative contracts involving the sale of foreign currencies and the purchase of Australian dollars. This was an increase of $426.8b on the 31 March 2013 result of $618.9b.
Forward foreign exchange contracts accounted for $686.9b (38%) of the total $1,801.7b of derivative contracts involving the sale of foreign currencies and the purchase of Australian dollars. This was a increase of $130.0b on the 31 March 2013 result of $556.9b.
At March 31 2017, of the total $1,801.7b, Banks accounted for $1,181.6b (66%) of derivative contracts involving the sale of foreign currencies and the purchase of Australian dollars. This represents an increase of $224.6b on the principal value of $957.0b reported by banks at 31 March 2013.
Notional principal values for derivative contracts not involving the Australian dollar have increased from the 31 March 2013 reported total of $1,492.1b to $2,959.0b for the current survey, an increase of $1,466.9b. Banks continue to hold the dominant share of activity in the market, accounting for 92%, consistent with the reported 94% at 31 March 2013.
While the United States dollar continues to be the dominant traded currency, having increased from $689.4b to $1,413.1b, the Euro increased from $168.2b to $364.4b between 31 March 2013 and the current survey.
HEDGING POLICY AND PRACTICE
Survey respondents were asked to provide quantitative and 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.
Hedging by foreign owned entities that are managed centrally by the parent company are not formally tabulated in this survey, however such cases are 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 have an effect on the measured foreign currency exposure of Australian resident entities. The same may also be true for Australian resident parent companies that hedge the foreign currency exposure of branches and subsidiaries centrally.
Table 9
At the aggregate level, foreign currency debt liabilities tend to be more conservatively hedged than debt assets. Of the total $1378.2b reported for debt liabilities, $772.6b (56%) was Hedged compared to $605.6b (44%) reported under the residual component, All other, indicating either a strategy of no hedging, hedging conducted by non-resident parent entities or natural hedging against other holdings in the portfolio.
In contrast, levels of exposure reported for debt assets under the "All other" component are significantly greater than the levels of exposure reported as Hedged. Reported equity and debt assets totalled $2,154.9b. Of this, the "All other" component accounted for $1,586.5b (74%), compared to the hedged component at $568.4b (26%).
Table 13
At the aggregate level, foreign currency payments from trade tend to be more conservatively hedged by a derivative than receipts from trade. Of the total $382.3b reported for payments from trade, $86.4b (23%) was Hedged compared to $58.2b (14%) of the $414.1b reported in foreign currency receipts from trade. Of the $127.3b in payments expected within the next year $56.1b (44%) was Hedged, indicating that near term payments are more likely to be hedged, with the level of hedging falling as the time horizon extends.
Tables 18 to 22
The following qualitative data refers to only those Australian resident enterprises that reported employing a hedging strategy as at 31 March 2017. Consequently, aggregate data in dollar terms may not align with comparative data items reported elsewhere in the publication.
Equity
Of the Australian resident enterprises employing a hedging strategy, levels of hedging for foreign equity assets vary considerably depending on sector. Banks remain risk adverse, with 96% of foreign equity assets under a full or partial hedge policy with a weighted average for partial hedging of 30%. Central borrowing authorities and general government almost entirely apply partial hedge policies, with a weighted average hedging level of 60%. Other financial corporations prefer to apply partial hedge policies, with 54% of foreign equity assets under a partial hedge policy with a weighted average hedging level of 39%.
Debt Assets
Of the Australian resident enterprises employing a hedge strategy, 43% of foreign currency denominated debt assets are under a full hedge policy.
Debt Liabilities
Of the Australian resident enterprises employing a hedge strategy, 64% of foreign currency debt liabilities are under a full hedge strategy.
Trade Receipts and Payments
Discussions with respondents during the editing phase of the survey suggest that near term receipts and payments are more likely to be hedged, with the level of hedging falling as the time horizon increases. In line with the results from the previous survey, a number of the Australian resident enterprises within the Other resident sector continue to rely on parent entities to perform hedging on behalf of the group.
SUMMARY
Overall, the reported net exposure of $1,061.1b after derivative holdings is largely due to foreign equity assets and expected net foreign currency receipts that are generally left exposed.
Different hedging policies across different financial instruments also explains why the net exposure after derivative holdings is greater than the net exposure before derivative holdings. 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.
FOOTNOTES
1. Net long is defined a position where total assets exceed total liabilities. <back
2. Net short is defined a position where total liabilities exceed total assets. <back
3. In this publication, the Chinese renmimbi was collected separately, and is no longer included in the Other currency class. <back
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