- The RBA has intervened on several occasions in recent weeks as AUD/USD threatened to trade below 0.60 raising speculation that 0.60 is the “line in the sand”. Though recent intervention efforts have been successful in halting a decline in AUD/USD through 0.60, an eventual break lower is a key risk on renewed risk aversion. Such a break could extend to 0.55.
- The RBA undertakes transactions in foreign exchange markets for several reasons. The least frequent, but most prominent, are those to influence AUD - intervention. This is distinct from the building (or drawing down) of foreign exchange reserves associated with the RBA’s foreign currency asset management. Intervention is infrequent, and is undertaken during periods in which the exchange rate is overshooting (either up or down). Typically, the RBA regards overshooting as periods where AUD has moved a long way very fast and in a way that does not appear to be supported by economic and financial factors, such as when market conditions have become disorderly, evident by persistent volatility, a sharp widening in bid-ask spreads or erratic movements of the exchange rate. These conditions do not suggest that intervention is to be used for targeting a particular level of AUD. Indeed, following the RBA’s intervention on Friday 24 October, a spokesperson stated that it was “to provide liquidity in an illiquid market”.
- The RBA is in the best position it has ever been to support the AUD. The Bank has been building up foreign exchange reserves (selling AUD to buy foreign exchange) steadily since 2001.
- Intervention doesn’t preclude new cycle lows in AUD/USD. As highlighted, the RBA’s intervention strategy is focused on limiting large scale overshooting of the exchange rate by
trimming the extreme tops and bottoms off the exchange rate cycle ie limiting the pace of appreciation (depreciation) in the currency at the top (bottom) of the exchange rate cycle. Such a strategy does not preclude a move to fresh lows. Despite heavy intervention in 1998, AUD/USD fell over 10 big figures over five months. Despite intervention post September 11 2001, AUD/USD fell 4 big figures in the following weeks. Despite intervention in mid August, AUD/USD fell 5 big figures.
RBA’s intervention to support AUD
October 31st, 2008 · No Comments
Tags: AUDUSD
0 responses so far ↓
There are no comments yet...Kick things off by filling out the form below.
You must log in to post a comment.