Liquidity Provided In Foreign Exchange

Sydney provides a deep and liquid foreign exchange market, with daily turnover of more than $35 billion, demonstrating how effectively the city has been able to exploit its time-zone advantage as the first market to open.

It now ranks seventh in international foreign exchange terms, with 8% of world turnover. About $18 billion is traded against the Australian currency and another $18 billion with third currencies.

Swap-related transactions account for $27 billion, and Australian dollar turnover offshore is just more than $13.5 billion.

Stability of government, a strong economy, and attractive interest rates during the mid- to late 1980s made the Australian dollar the sixth-most-traded currency in international markets.

Competitors' Positions

Neither Hong Kong nor Singapore permits international trading of its domestic currency.

The achievement of the Sydney foreign exchange market is all the more remarkable because of the relatively short time it has had to develop.

The system of exchange-rate management in Australia came under severe pressure in 1983. Domestic markets had by then been substantially deregulated, so that interest rates were market-determined.

However, the exchange rate was controlled by monetary authorities, leaving an uncomfortable imbalance in monetary management.

Exchange controls prevailed, but by the early 1980s, Australian banks and merchant banks had such well-established overseas links, facilitating large corporate flows, that movement of funds into and out of the country was fairly easy.

After election of the Labor government in March 1983, heavy outflow of funds from the country became alarming to the new government, which decided to devalue the currency by 10%.

Devaluation's Aftermath

The devaluation effectively reversed the outflow of funds and settled conditions in the foreign exchange markets, but the hefty once-off devaluation contradicted the philosophy of the so-called flexible peg system that had been used to determine the rates daily.

It was inevitable that speculative pressure on the currency would again build up, as it did. Hence, in December 1983, then Federal Treasurer Paul Keating announced that the Australian dollar would be floated.

Since the float, the major Australian trading banks have helped increase currency trading volumes to their current levels. Westpac Banking Corp. and the government-owned Commonwealth Bank are the two largest players in the Australian dollar market.

However, a considerable number of foreign banks in Sydney are also active - Bank of America and Bankers Trust, in particular.

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