Forex Investment and Currency Trading

• Despite AUD/USD hitting post float highs in May, the RBA’s net selling of A$ on market was no more than average, and is actually lower than average.
• The RBA sold a net A$336mn in May (from selling A$305mn in April).
• One of the reasons for the bullish view on AUD is that market suspects the RBA could be hoping a higher AUD will do its work and help it avoid having to hike rate further. Given the stress the household sector is undergoing (high mortgage rates, food and fuel prices), the RBA likely prefers to see the external sector rather than the household sector bearing the burden.
• Recent comments/suggestions from the RBA and Gov Stevens about a higher AUD helping its inflation battle are tacit endorsement from the RBA for AUD to head higher.
• The FX transactions data today reinforce the view the RBA is not leaning against appreciation in the AUD. Despite AUD/USD hitting post float highs in May, the net A$ sold on market less than average. In fact, since Nov 2007, just as the RBA stepped up its pace of rate hikes, the RBA has backed off from leaning hard against AUD’s appreciation.

The RBA undertakes routine operations in the FX market (eg. covering Government FX needs etc). But its approach to intervention has also evolved significantly over the past two decades. Broadly, the focus has been in times where the AUD has ‘overshot’ (moved to a level inconsistent with economic and/or financial developments). The RBA executes this by doing lots of small “daily interventions” that are aimed at smoothing the exchange rate. It will only engage in less frequent and larger scale interventions once the exchange rate has moved a long way.