Christopher Kent, assistant governor (financial markets) at the Reserve Bank, has just delivered a speech at the Australian Financial Markets Association/Bloomberg in Sydney.
It was titled "Australia's external position and the evolution of the FX Markets."
He talked about some of the major changes that have occurred in Australia's external position and foreign exchange markets after we floated the dollar in 1983.
He says the growth of superannuation funds since 1993 (after compulsory super was introduced) and their rising offshore investments have significantly shaped Australia's balance of payments.
He says super funds now account for a "substantial share" of Australia's capital outflows.
He says Australians have steadily accumulated more foreign equity holdings than foreigners have accumulated in Australian equity.
In fact, since 2013 we've had a net equity asset position.
He says the rise in net equity assets of late has even occurred while Australia has been running a current account deficit, "creating an unusual situation."
"Inflows of new liabilities rose with the banks returning to offshore debt markets as the RBA’s Term Funding Facility came to an end.
"However, a further rise in foreign equity holdings offset this, so net liabilities still declined.
"Much of the rise in net foreign equities reflects valuation effects from the Australian dollar’s depreciation and rising overseas equity values.
"Even so, new equity accumulation continues, driven by investment from Australia’s superannuation funds.
"Super funds’ offshore asset allocation has increased from nearly one-third in 2013 to about half in 2024."
Mr Kent says super funds' purchases of foreign currency assets exposes them to exchange rate fluctuations.
He says many super funds shield their members by partially hedging the foreign exchange rate risk associated with offshore assets via, for example, FX swaps.
And that hedging activity has increased a lot.
He says given the large increase in super funds’ offshore assets, the extent of foreign currency assets hedged has more than quadrupled since 2013.
He says this has made our super funds natural counterparties to Australia's domestic banks, which are hedging their FX exposures arising from issuing debt offshore in foreign currency terms.
Trump's tariffs and exchange rates
Which gets us to the point of his speech.
Mr Kent says this discussion highlights the increasing role of superannuation funds and their asset managers in FX markets.
He says for FX markets to meet participants’ needs, it is important that they all observe common standards promoting fair and transparent markets.
So, he spruiks the importance of the relatively new "Foreign Exchange Global Code."
"With the advent of the Code in 2017, buy-side participants like super funds can have greater confidence in market functioning and the behaviour of their sell-side counterparties.
"But this is a two-way street: both sell-side and buy-side firms should adhere to the Code’s standards.
"Moreover, one way for fund managers to demonstrate that they are meeting their fiduciary duties is to adhere to the Code.
"Encouraging more buy-side participants to sign up is a focus of the Global Foreign Exchange Committee (GFXC).
"To this end, the GFXC has worked hard to explain the process of signing up to the Code.
"We have emphasised that adoptees can concentrate on those aspects of the Code that are material to their activities, thereby greatly reducing the burden for buy-side firms," he says.
And he ends by talking about the sharp rise in volatility in FX markets we saw in early April as markets adjusted to Donald Trump's tariffs plan.
He says it showed how important the Code was for FX markets.
"The Australian dollar fluctuated within a range of US 4 cents, experiencing its largest daily decline of 4.5 per cent against the US dollar outside of the global financial crisis," he said.
"Also, measures of volatility from FX options increased to levels observed during the pandemic and liquidity deteriorated noticeably.
"While markets have been more settled of late, such episodes serve as a reminder of the importance of the Code. It enhances trust between market participants and offers standardised and predictable ways of doing business.
"Hence, the role the Code plays in proper market functioning is even more crucial during periods of great uncertainty when markets are adjusting to significant economic news," he said.
