The RBA is not intervening in the Aussie

AUDUSD - Down on concerns of RBA intervention and stock weakness

The RBA is a small central bank running a very diverse and open economy with a freely floating currency so that it can set interest rates inside the economy where it feels they need to be set. This combination of factors has allowed the RBA to shepherd the economy through all the global crises of the past 20 plus years without slipping into recession. It is a truly magnificent feet and one that leaves this analyst in awe of their ability.   

Now of course it doesn't mean I don't disagree with them or have trouble with some of the things they do but they genuinely have a mantra of "do no harm" and given managing the Australian economy is a bit like juggling 7 balls they have done a more than credible job.   

Which brings me to the point of today's piece - notions floated yesterday that the RBA is intervening in the Aussie Dollar are an absolute misnomer and misunderstanding of the way our Central Bank conducts itself. The RBA prefers a free float if for no other reason than its balance sheet is too little to cope with the world's 5th most traded currency but equally because it allows it the freedom to set monetary policy inside Australia free of any impact from either buying or selling the AUD.   

Of course the RBA enters the market at times to buy or sell the Aussie. It does it when doing transactions for the Australian  Government, for its own balance sheet or when the market for the AUD is getting dysfunctional. In the past it has pretty much needed to provide support to the AUD when it was gapping lower but it does not draw lines in the sand like its cousins the SNB or BOJ.  
RBA Transactions 
If you look at the chart above you can see the net RBA transactions on market versus the AUDUSD rate. The red bars are the net of What the RBA does on market + what it does with the Australian Government and "Other outright" trades which are generally those done with other Central Banks and Sovereign Entities. Below the zero line is buying AUD above the zero line is buying foreign currencies.   

Yesterday when they released the data that showed they had done $483 "other" transactions there was speculation that they were intervening.  
What that transaction actually means though is that someone offshore, lets say the Russian Central Bank,  came to the RBA and said we'd like to sell you our currency and buy some of yours. What the RBA did was say sure here you go. But what the RBA didn't do was sterilise that transaction by backing it out with the market - rather it accumulated the Foreign Currency onto its balance sheet.   

Now it is true that over the past 3 months the RBA has stepped up this "other" transactions and the as a result the net accumulation of FX reserves has grown by  $1.32 billion when in the previous 12 months they only grew reserves by $951 million net.  
But to characterise this as intervention is a misnomer and mis-understands the way the RBA manages the Aussie Dollar's float. They might be not buying AUD so they don't add upward pressure to the AUD from the transactions they are doing with other Central Banks and Sovereigns but its a long way from intervention.  

The appetite in Australia for the RBA to intervene heavily at the policy maker level is simply not their. While there is uncomfortableness with the high AUD both sides of politics are wedded to the free float and realistically the free float has been a very strong part in the 22 years or so that the Australian Economy has gone without a recession.  

Just briefly on the charts we see that after weeks of ignoring the equity market selloff the AUD has finally had a sell off of its own in the past day or so. It has now broken the recent uptrend line from the September low at 1.0150ish and I am now looking for a move into the mid 1.0250 region and possibly a retest toward the bottom of the recent range at 1.0150.

EURAUD - continued bounce

The EURAUD continued its rally eclipsing the 1.2373 level I mentioned yesterday as a purely normal retracement with a high overnight at 1.2398.  

As you can see in the chart above it pulled up in the middle of the Bollinger Bands and my indicators are a bit confused on the dailies. The ADX says momentum is still strongly negative but the MACD suggests to me that there is more positive price action to come. So flat rather than long looking to get in short again might be a good way to play it. 

AUDJPY - dragged higher by USDJPY

I'm on the record saying I like this one and USDJPY both sharply higher based on where Japan is and the continued comments by putative Prime Minister Abe about Yen printing are hitting the market and the Yen is off and the nikkei is up.  
So too is the AUDJPY higher and trying to break further north - the idea of north to me is reinforced by the relative economic outlooks but complicated by the AUD's recent reacquaintance with the equity selloff and thus downward pressure on AUDUSD. But a break of the recent high at 84.12 +13 points would see me looking for 85.90/86.00

AUDNZD - found support at recent lows

AUDNZD sold off but then as the NZD came under pressure it rallied off the low of the other day with a low at 1.27135. This is an interesting one and I would love to see it much lower given I think its going much higher but if equities continue to tank its the NZD that is likely to get hit harder than the AUD.  
We'll have to see and only a break of 1.2700 would open a move lower.  

Greg McKenna 

Catch me on Twitter @gregorymckenna or @FX_Global

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