Will the RBA intervene in the Australian Dollar?

See the latest Australian dollar analysis here:

Macro Afternoon

Cross posted from www.globalfx.com.au

The Australian Dollar made a high at 1.0525 last night and with the Fiscal Cliff avoided, stock markets ebullient, commodities independently strong even with the overnight US dollar strength and Chinese and US PMI’s signalling an economic recovery there seems to be little headwinds to an Aussie dollar that can trade even higher in the months ahead.

Clearly the Australian dollar and its strength are having an adverse impact on the economic outcomes for Australia as the mining investment boom slows, as the terms of trades reverses a little from its recent highs and as Australian Households continue to guard their pocket books and spending with the aplomb of a crack SAS squad.

However as we wrote back in December – The RBA appears happy with a high Australian dollar. Now as the AFR wrote yesterday that is not to discount the fact that the “Dollar will trouble RBA”The article looks at the enduring demand for Aussie Dollars by Sovereign wealth managers and Central Bank reserve managers noting that,

National Australia Bank global co-head of foreign exchange strategy Ray Attrill estimated that the Australian dollar accounted for 2.25 per cent of global foreign exchange reserves in the September quarter, and central bank demand in the order of $13?billion. “This means that demand for Australian and Canadian dollars by reserve managers rose beyond what would have been associated with pure reserves rebalancing needs,”

That is true and we continue to believe that the Aussie Dollar is going to be stronger for longer – Global FX markets are essentially least ugly contests and Australia, for all the ills that those of here at home continue to see, stands out to global investors as a safe harbour in troubled times.

Australia has:

  • A Triple A rating which is crucially untroubled at the moment by debt, fiscal position or growth
  • Relatively high cash and 2 year interest rates
  • Relatively strong economic growth
  • Relatively low inflation
  • Still high commodity prices and terms of trade – even if they are off their highs
  • A biggest trading partner (China) which appears to have avoided a hard landing
  • All of which mean the positive feedback of positive sentiment toward it from investors both small and big

That doesn’t mean that the Australian Dollar is going to head to the moon but what it does mean is that the likelihood of a material Aussie Dollar fall without some kind of domestic or international catastrophe appears low.

So of course the chances are then that at some point the Aussie makes a further topside probe into the mid 1.0850 or back toward the highs of 2011 (not a forecast) at 1.10/11.

As Andrew Salter of ANZ FX Strategy said in the AFR piece a move here or onto 1.15,

Absent an improvement in Australian domestic fundamentals or commodity prices themselves, I think that would constitute a stronger case for the RBA to take a more active role on the exchange rate,” he said. “I think when I say ‘active’ I mean a greater pace of reserve accumulation relative to what we saw in August through to October.”

Remember that  the RBA accumulated more than $1.2 billion in Foreign Reserves by not sterilising (that is buying back) Aussie Dollars that it had sold to “other” Central Banks and Sovereigns. In November however it only accumulated just over $100 million.

RBA, RBA Transactions, RBA Intervention


This accumulation of Foreign reserves is entirely appropriate if the RBA thinks the Aussie Dollar is higher than it should be and it has the opportunity to build up its own asset position without putting further upward pressure on the dollar.

But will it go further than this “tacit” intervention and take the next step to outright selling of the Aussie Dollar?

This history of the float since December 1983 is important to note in this regard. While the Aussie’s history has been one replete with falls and crashes where the RBA has needed to come to the “battlers” rescue it has generally only intervened and intervened in size when the market has become dysfunctional.

I remember sitting next to an RBA operative at a CBA dinner back in the 1990’s when the AUD was being slammed and he upped sticks and said he had to tend to a sick child. That was a big night of intervention but it wasn’t a line in the sand it was to add liquidity to the market to stop a free fall. Equally back in the early 2000’s around 10am one morning the liquidity evaporated from the market and the bids disappeared and the RBA rode in on its horse.

These are but two examples of RBA intervention across almost 30 years of a free floating currency but they are indicative of their modus operandi.

But trying to slow selling pressure is very different to trying to stem buying pressure. The RBA, or any central bank as we saw in the Asian crisis, only has so much foreign reserves that it can sell in order to hold its currency up and stop it falling. But in theory it has unlimited amounts of its own currency that it can sell to the market if it so wishes.

Like the Swiss Naotional bank the RBA could stand in the market selling the Aussie to any and all comers – for a time at least. But unlike the SNB there appears little political appetite on either side of the political spectrum for a line in the sand style Swiss policy and there also appears a lack of intellectual appetite if the RBA’s utterances are to be believed.

So will the RBA intervene?

Tacitly as Andrew Salter of ANZ alluded to – absolutely.

But the RBA is unlikely to draw a line in the sand unless we have a policy debate here in Australia and the Government would support such a move. The preconditions for this are not yet there but a sustained period above 1.10 should it come might change things.

For now then the market is free to push the Aussie Dollar where it will.


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  1. It’s a great question, but frankly I think that the horse has bolted on any RBA action to reduce our dollar significantly. Iron ore prices seem resilient, and they look like they will remain that way for a decade or more.

    I think that it’s time for government policy stimulus specifically directed towards our “export’ industries whether that be manufacturing, education, tourism, or primary production.

    Despite the thought of any protectionism or direct stimulus being against the prevailing wisdom, it’s time they were put back on the table for consideration. The alternative is to slide into oblivion when this mining boom finally ends. Primary production, although good can only earn us just so much as an export industry. We need new technology as well as our traditional industries, and to attract that technology and re-invigorate our other industries, if we have to subsidise, then so be it.

    • Well i/o has got off to a great start for 2013 – Pilbara fines 147.50/t – and I for one like your optimism for the next decade. Fingers crossed 😉

      • This is nothing more than blatant cheerleading for Quarry Australia. It is a non contribution. An empty spruik.

        Given that we know 3d1k earns cash for comment, I suggest he/she/it be banned from MB for 2013.

        • Chill mate. I don’t pretend to know how long the current pricing will be maintained for, quietly optimistic post $120 for some time, could be wrong. If reasonable price and demand circumvents ToT meltdown then that is good for all.

          I like Peter’s enthusiasm – you should try it 😉

          • ps – not an empty spruik nor a non contribution rather a channelling of my inner HnH: keeping readers abreast of i/o price which, given the daily posts dedicated to such, HnH clearly considers important.

          • You are paid to comment here by mining industry interests.

            Your comments contribute as much to the debate as a press release from the Minerals Council.

      • Given the comments from the new Chinese Premier in December I’m inclined to agree. The new regime appears very focussed on taking better living standards deep into rural areas- more steel needed for that although not the stimulous of past years.

        A floor perhaps though.

  2. GunnamattaMEMBER

    Peter I tend not to agree with some of the things you write but agree with that post (except the bit about iron ore prices).

    It is time to look at support for exporting or import competing industries. The rest of the world is devauing currencies largely to support domestic demand, even the Swiss have stood up for their own import competing sector and sent a clear signal about the CHF.

    That said, I dont actually think there is all that much the RBA can do. I kind of like the Alan Kohler suggestion that the government issue infrastructure bonds of one sort or another and specifically cash in on demand for Australian paper – that would provide a lot of the stimulus needed. But even then that would only be a short term measure – I tend to the view that what is needed is to go back to square one and identify what sort of economy we want our kids to have, whether we want them doing complex things or not (or whether we are planning on exporting them to UK, US or wherever) and working towards that. I am talking about industry policy (yes picking winners and losers) although I realise that is anathema to our ruling parties.

    But sitting by and doing little or nowt simply raises the likelihood of an ‘oh sh*t’ moment at some point down the track – and I suspect that isnt far away – which really hurts.

    • ” I tend to the view that what is needed is to go back to square one and identify what sort of economy we want…”

      Second that.

    • Jeesh! Ricardian Ambivalence ran an informative series of posts on the question of managing the AUD – worth a look.

    • Deus Forex Machina

      Thanks for the link – that is a good piece and helps explain that a peg or line in the sand is no panacea but simply a transfer of risk from one type to another.

      In Australia’s case it would be the transfer of currency appreciation risk for the economy and business to market and balance sheet risk for the RBA and thus Australian taxpayers.

      In either case its a Damoclian sword – which is why a debtare would be required before the RBA was to wade in and start printing.

  3. Hate to break it to you Glenn believers, but as he is looking for the exits soon, I doubt he’ll be doing a hell of a lot.

    • Deus Forex Machina

      You don’t have to believe he is brilliant just not stupid – whether he stays or goes shouldn’t matter as either way I can’t see him doing anything much the RBA just doesn’t seem to believe in large scale line in the sand style intervention.



  4. Excellent summary of the state of play.

    RBA does not stand for Rapid Banking Action and a major change in their approach to the exchange rate any time soon seems very unlikely.

    And to be fair the sort of change in approach that many have discussed really should be driven by our political representatives and not the RBA.

    Significant messing with the float (as against poking it at the edges from time to time) is the job of the government.

    It is important to keep in mind that many of the drivers of the exchange rate can be influenced by government policy and not the RBA and they (Mr Swan and Co) are the ones complaints about the exchange rate should be addressed to.

    Note: Mr Swan has not exactly drawn this to the public’s attention. It suits his purpose for everyone to be chasing the RBA for action.

    Trying to manage the exchange rate in the present environment with interest rates is like handling flood waters with a wettex.

    • GunnamattaMEMBER

      ‘It is important to keep in mind that many of the drivers of the exchange rate can be influenced by government policy and not the RBA and they (Mr Swan and Co) are the ones complaints about the exchange rate should be addressed to.

      Note: Mr Swan has not exactly drawn this to the public’s attention. It suits his purpose for everyone to be chasing the RBA for action.’

      And this is what makes this year so precarious. It is an election year and we can be sure that Swan will not be poking his head above the parapet to flag changes in policy involving taking responsibility for outcomes the public associate (rightly or wrongly) with the RBA. Neither will Hockey.

      And given that bipartisan refusal to look at even the concept of exchange rate policy, we at MB, the broader public, and the global financial community are probably right to assume that the AUD will be allowed to stay high (making it ever more painfull for retail consumer and real estate sentiment, disastrous ultimately for jobs, and a great parking place for those with funds looking for safe yield)

      • Yes – That appears to be the most likely outcome.

        There are plenty of pros and cons to the current high exchange rate (as the last 12 months of MB thread comments confirm) and Mr Swan has probably taken the jaded and politically cynical view that washing his hands of the issue is the safest option.

        The sort of policy action that is likely to have a downward effect on the exchange rate is likely to consequential effects that Mr Swan possibly fears more than damage to manufacturing, tourism and the education sector.

        For example:

        Limiting the ability of foreigners to purchase Australian financial and other assets or the attractiveness of doing so is likely to put upward pressure on interest rates as local sources of capital become more necessary.

        • GunnamattaMEMBER

          Mate, I agree with you in principle

          But can you imagine the impact that would have on

          …equities (super funds etc) and the attendant screams from babyboomer types, financial industry, super industry etc

          …real estate and the attendant screams from the real estate ponzi lobby, state governments, heavily indebted investment property owners.

          But for sure the suck it up message implicitly backing the lack of action on the AUD is effectively feeding Australias economic future (and the generations who will live there) to Australias economic past and the current inheritors…

          • Precisely, the results of any action to reduce the exchange rate will not be all peaches and cream.

            Certainly, I think it is in our long term interests to become more self reliant for capital and less reliant on the savings habits of foreigners but it is not going to be a walk in the park denying ourselves some of the short term pleasures of easy credit.

            Mr Swan does not display the stomach for reform which is a real pity because it was the commitment to reform that won the ALP respect in the 1980s and got it over the line in some very tough and hard fought campaigns.

            As economics/ economic reform appears to be a weak spot for Abbott it might be worthwhile strategy. Unfortunately, it is a subject that Swan appears to be a bird of a feather with Abbott.

          • Gunna of course you are right. However Stein’s will apply.

            As JFK said “If not now, when?”

      • Gunna…why do you say “AUD will be allowed to stay high (making it ever more painfull for retail consumer and real estate sentiment,”
        I’d have thought the retail customer is very happy with the high dollar and RE quite demonstrably benefits in most countries running a CAD provided they are able to borrow to cover the deficit.

        • Precisely flawse. As a retail customer who buys a lot from the US (REI (hiking gear) and Amazon (almost everything else)), I love the high dollar. But probably unlike most Australians, I’m aware of just how much damage our CAD and high dollar is doing to this country.

          • How good is REI?

            Ive been to a couple of their big stores in the US. Aus retailers could learn a learn a thing or two from them.

          • GunnamattaMEMBER

            Yeah the CAD is a joke….

            Sometimes I think I am the only killjoy in the world who walks into shops in the Xmas/NY period and wonders what stuff is made in Australia and feels sad about the CAD

        • GunnamattaMEMBER

          Sorry Flawse, I should probably have punctuated that a tad (and spelled painful correctly).

          As weird as this may sound I actually think the overt sensibility of buying things from OS (I speak of one who has shelled out 300 bucks for a kids pram ordered from the US – delivered within 5 days – within the last fortnight, when I could have walked into a local shop and paid 600 for the same thing) is actually undermining local retail sentiment, and local shoppers know it cant last.

          • Gunna…my daughter in Law ordered Jeans in New York on Saturday morning.
            They were delivered in Sydney on Monday!!!!

  5. Just one thing….in the RBA notes there is almost always a caution re inflation. Maybe the Glenn isn’t as silly as everyone portrays and can see it. (Note to me it is plain as day!)
    Suppose he lowers interest rates (1-2%)to give the dollar a smacking. Then the inflation arrives in a wave and he ends up having to raise interest rates 3 or 4% next year to smack it what sort of shellacking would he get from everyone?

    I agree with pfh that this is really a fiscal policy problem.
    “Trying to manage the exchange rate in the present environment with interest rates is like handling flood waters with a wettex.”

    Again…pure GOLD!

    • GunnamattaMEMBER

      that was a very nice line I must say!

      I agree that if we suddenly get the dollar drop we will have an attendant inflation spike about within the short term, which is why I think the sudden drop is not in Australias interest.

      That said I think that is what Australia will get, because there is no way of managing a gentle decline (wettex – floodwater)

    • Agree – the choice he has is inflation(low AUD) or a hollowed out economy (high AUD) . I think they will print, as inflation hasn’t struck other economies yet, and they have been printing a while.

      RBA will kick the can, but I am betting the AUD is heading to $1.15 USD.

      • GunnamattaMEMBER

        I actually think that right at this moment we are on track for both of the outcome choices you mention.

        I think we are certainly getting a hollowed out economy and we are setting ourselves up for an inflationary jolt at some indeterminate point in the future (there is no sign of it right now) – presumably after having hollowed out our economy.

        • Gunna..the signs are

          1.Non-tradable inflation running at 4 to 5%. Non-tradable inflation has at its core the problem of monopolistic and oligpolistic activities of various corporaations, professions and unions. It will not go away and will be exacerbated on any increasing pressure from the non-tradable account.

          2. Tradable inflation at around zero despite a rising dollar. FOB prices out of China are rising although the rate of increase has recently slowed from over 10% annually.

          3. Demographic and prosperity effects in China. Wages are rising rapidly and labour shortages are widespread.Younger workers will not work in many traditional factories preferrong a desk in an air-condioned office with a computer.

          4. Retailers and distributors in Australia have been displaying margin stress for several years. At some stage, on the failure of some of these companies, margins will begin to increase.

          There are many other more subtle signs but these are the main and most obvious.

          Inflation is inevitable. Timing? HTF would i know 🙂 but not as far away as some who think they are ‘experts’ in here think.

          • Gunna…note the PMI report from a few days ago…Australian factory input costs and wages rising rapidly.
            More detail is necessary to really comment but on the face of it it is a worrying trend.

          • P.S. Correction re FOB prices rising at 10% annually!
            FOB prices ex China were rising at 10% annually!