Most analysts misguided on Aussie dollar: report

Most commentators analysing the current lowly status of the Australian dollar have got it wrong, according to research by State Street.

Most commentators analysing the current lowly status of the Australian dollar have got it wrong, according to research by State Street.

The funds management and custodial giant says bonds rather than equities have been dragging the Aussie dollar.

State Street senior analyst Brian Garvey says overseas investors have been exiting the Australian bond market at a rate seven times the rate of their exit from the Australian share market.

Garvey says the new economy/ old economy theory has been overemphasised.

“The new economy story has provided a convenient excuse for the AUD weakness, but an analysis of State Street’s portfolio flow data suggests its impact has been vastly overstated,” he says.

Instead, overseas investors have dumped Australian bonds due to Australia’s huge current account deficit. Garvey says Australia’s interest rate structure is not per-ceived to “provide a sufficient risk premium for a country with a current account deficit of 5-6 per cent of GDP”.

And the current account deficit has been hampered by the huge amount Australian companies are spending on importing information technology to equip themselves for the growth in Internet related business.

State Street’s analysis is based on the flows of money around the world in bond and equity market based on the $6.2 trillion the group has under administration.

Overseas investors have abandoned the market on mass this year after a year of strong inflows in 1999, according to State Street data. In fact bond outflows have been the equivalent of 2 per cent of the market, as measured by the outstanding ACGB market. At the same time, there has been no mass exodus by overseas in-vestors from Australian equities markets.