Information on Australian foreign currency exposure and the hedging activity undertaken to mitigate the risk associated with this exposure
As at March 31 2022:
The level of foreign currency denominated asset hedging was $912.6b of $3,282.1b total assets at 31 March 2022, compared to $568.4b of $2,154.9b at 31 March 2017.
The level of Foreign currency denominated debt liability hedging was $690.7b of $1,265.9b total debt liabilities at 31 March 2022, compared to $772.6b of $1,378.2b at 31 March 2017.
As at 31 March 2022, Australian resident enterprises had a net asset foreign currency exposure of $2,389.9b after taking account of hedging through the use of derivative contracts.
This is an increase of $1,328.8b (125.2%) on the 31 March 2017 exposure of $1,061.1b.
The foreign currency balance sheet exposure at 31 March 2022 was a net asset position of $2,017.5b, an increase of $1,240.7b on 31 March 2017.
Banks were the most active sector buying and selling foreign currency derivative contracts in exchange for Australian dollars.
Of the total principal value of foreign currency derivative contracts bought and sold in exchange for Australian dollars, Banks represented:
Net foreign currency balance sheet exposure was $2,017.5b at March 31, 2022. Net balance sheet exposure in the United States dollar was $1,198.2b.
Loans accounted for $480.5b of the total foreign currency denominated debt assets of $1,224.9b, Long term debt securities accounted for $253.7b.
Long-term debt securities accounted for $500.9b of the total foreign currency denominated debt liabilities of $1,265.9b, Deposits accounted for $276.1b.
Total foreign currency denominated short-term debt security liabilities was $179.2b at 31 March 2022. Of this total, $133.3b was hedged, of which $99.3b was maturity matched.
Total foreign currency denominated long-term debt security liabilities was $500.9b at 31 March 2022. Of this total, $380.5b was hedged, of which $272.8b was maturity matched.
Formal responses and respondent discussion indicate hedging strategies have changed little in the past two years, nor due to influences from COVID-19. Adversity to risk and minimising exposure are still common practices, though the volumes of hedging have changed, the policy and methods are largely unchanged.
Some respondents reported foreign exchange exposure is managed at the Australian level. In some instances, hedging strategies are employed on a security-by-security basis, however larger organisations tended to apply a broader approach where securities were collectively hedged to manage risk.
The appetite for risk was low amongst those respondents where discussions took place, particularly within the banking sector. When partaking in foreign exchange hedging to reduce exposure, gains or losses were accepted though not viewed as core business. Hence in most cases assets and liabilities are hedged close to transaction timing with limited warehousing of foreign exchange risk occurring.
At the aggregate level, foreign currency debt liabilities tend to be more conservatively hedged than debt assets.
| Total all currencies ($b) | |
|---|---|
| Foreign currency denominated assets (incl equity and debt assets) | $3,282.1 |
| Hedged (fully or partially by derivitave) | $912.6 |
| All other (unhedged or hedged without derivitave contract) | $2,372.1 |
| Foreign currency denominated liabilities | $1,265.9 |
| Hedged (fully or partially by derivitave) | $690.7 |
| All other (unhedged or hedged without derivitave contract) | $577.3 |
‘All other’ indicates either a strategy of no hedging, hedging conducted by non-resident parent entities or natural hedging against other holdings in the portfolio.
In contrast, levels of exposure reported for debt assets under the "All other" component are significantly greater than the levels of exposure reported as Hedged.
‘All other’ indicates either a strategy of no hedging, hedging conducted by non-resident parent entities or natural hedging against other holdings in the portfolio.
At the aggregate level, foreign currency payments from trade tend to be more conservatively hedged than receipts from trade.
| Total ($b) | |
|---|---|
| Hedging of foreign currency receipts from trade | $ 522.4 |
| Hedged | $ 21.5 |
| All other | $ 500.2 |
| Hedging of foreign currency payments from trade | $ 315.3 |
| Hedged | $ 103.2 |
| All other | $ 211.6 |
‘All other’ indicates either a strategy of no hedging, hedging conducted by non-resident parent entities or natural hedging against other holdings in the portfolio.
Expected foreign currency payments from trade are more likely to be hedged within the first year.
| Less than 1 year ($b) | Greater than 1 year but less than 4 years ($b) | |
|---|---|---|
| Hedging of foreign currency payments from trade | $ 140.0 | $ 176.2 |
| Hedged | $ 77.7 | $ 25.4 |
| All other | $ 62.1 | $ 149.8 |
’All other’ indicates either a strategy of no hedging, hedging conducted by non-resident parent entities or natural hedging against other holdings in the portfolio.
The following qualitative data refers to only those Australian resident enterprises that reported employing a hedging strategy as at 31 March 2022. Consequently, aggregate data in dollar terms may not align with comparative data items reported elsewhere in the publication.
The level of foreign currency risk Australian resident enterprises accept can be viewed in the amounts of equity, debt assets, debt liabilities, receipts and payments from trade, hedged, and unhedged. The amount partially hedged, and the percentage of the partial hedge, also provide an insight into the policies applied.
Total equity assets, usual or benchmark level of hedging, for all sectors, was $1,010.8b.
Total equity assets have the below percentage breakdown of hedging policies applied:
Total debt assets, usual or benchmark level of hedging, for all sectors, was $814.5b.
Total debt assets have the below percentage breakdown of hedging policies applied:
Total expected receipts from trade, usual or benchmark level of hedging, for all sectors, was $313.3b.
Total expected foreign receipts from trade have the below percentage breakdown of hedging policies applied:
Total, foreign currency debt liabilities, usual or benchmark level of hedging, for all sectors, was $1,080.4b.
Total foreign currency debt liabilities have the below percentage breakdown of hedging policies applied:
Total expected payments from trade, usual or benchmark level of hedging, for all sectors, was $268.6b.
Total expected foreign payments from trade have the below percentage breakdown of hedging policies applied:
There has been little change to the benchmark level of hedging over the last two years.
| Equity assets total all sectors % | Debt assets total all sectors % | Receipts from trade total all sectors % | Debt liabilities total all sectors % | Payments from trade total all sectors % | |
|---|---|---|---|---|---|
| Yes, increased | 2.5 | 2.7 | 3.3 | 4.4 | 4.2 |
| Yes, decreased | 3.0 | 1.8 | 1.8 | 1.3 | 2.7 |
| Unchanged | 28.3 | 38.2 | 32.2 | 45.8 | 38.2 |
| No set benchmark | 66.2 | 57.2 | 62.8 | 48.6 | 54.8 |