Central Bank Question

Have a question, after reading the following article should someone be bullish or bearish on the aussie dollar?

What does this mean when they say they are "selling the australian dollar" on the open market.

Just confused in general by central bank operations and what they are trying to do here. Inflate their currency? deflate? thanks for the clarification.

http://www.ft.com/cms/s/0/bbdf32a4-7227-11de-ba94-00144feabdc0.html

 

I suppose, on the margins, one should be bearish Aussie on the news you have cited.

However, it's not clear whether the RBA is purposefully intervening to weaken the currency or if it's just them playing around with their portfolio (who knows, maybe they managed to somehow get long Aussie and needed to sell it).

 

it does say there was a record amount sold, but on the other hand, could it mean there was a record amount BOUGHT, i.e. a record demand??

 

the article had a couple of points. the first to me would seem that they are trying to devalue the currency to make the australian economy more competitive. it is very much based on manufacturing and mining. quite likely.

the other is shown in this quote

“Hundreds of billions worth of bonds were issued under government guarantee round the world. And those same authorities now have a contingent liability on their balance sheet which may indeed ‘require’ a higher level of reserves.”

in other words they have such high liabilities in debt (new debt they issued to make up for the financial crisis) they have to have the cash to back it up. this could mean they think a large percentage of that debt could default. very concerning if that is the case.

probably not a good time to go long if that is the case because they are worried they won't be able to back up debt they issued.

however long term (if you like that) they have vast resources and a good workforce so will likely recover fast.

 

This might clarify things (or it might be the same FT article, which I can't read)...

http://online.wsj.com/article/BT-CO-20090716-700031.html

In general, it doesn't sound as if they're explicitly intervening, which implies that it would be hard to be certain about the direction the Aussie is headed.

 

you may be right. it looks as if the previous article tried to put a spin on it to get a story by fear when it is likely just the general operation of the bank.

however it does concern me that they are building reserves rather than breaking even, which the previous article indicated was not normal.

this may suggest they are concerned that debt they issued is not backed.

anyway good post.

 

why would it be a concern if they were building reserves? Possibly building up for a coming "storm"?

 

exactly. like that quote suggested. they know they will not be able to meet all of the debt obligations they have made so they have to get more reserves to fund it. so in the short term and medium term it is worrying. in the long term it will be a good investment relatively at least.

good post anyway keep it up.

 

Thanks....another central bank question

http://www.ft.com/cms/s/0/c480f2f4-7122-11de-877c-00144feabdc0.html

They said in the article that China has increased their reserves to $2,000bn. What I am wondering is why does this put pressure on the USD as the article says?

Is it because people are investing in Chinese assets, selling the dollar to convert to the renminbi, and in turn the Chinese have to buy dollars/treasuries to maintain a virtual peg to the USD? Am I close?

 

No, the logic of the article is actually a bit convoluted...

They're saying that, as USD weakens in the mkt, the Chinese increase their USD reserves in an effort to maintain the RMB peg. Which means that their portfolio ends up overweight USD. However, this also implies that, to prevent being overweight USD, they will then have to diversify out of dollars into other ccies, which should eventually weaken USD.