AUD/USD Looks Over Bought

"AUD should be mildly supported over the RBA meeting on Tuesday. 60bp are priced into the year end, which may be too much given the strength of Australian data" - Bank of America Merrill Lynch.

If foreigners want to hold more Australian dollars in order to park these dollars in foreign exchange reserves and will not be using these dollars to buy Australian goods and services, then the best response is for the Reserve Bank to print more Australian dollars. These additional dollars should be sold to foreign central banks in return for foreign assets. The foreign assets would appear on the RBA balance sheet exactly balancing the increase in money supply. There would be no effect on the domestic economy from this global shock if the RBA undertook this transaction.

This policy could be carried out either by direct transactions with foreign central banks or it could be done in the foreign exchange market by the Reserve Bank buying foreign currency equal to the amount they know foreign central banks are buying of Australian dollars. It is the case that the Australian money supply would increase but this would be by the amount of purchases by foreigners and thus domestic liquidity would be unchanged and domestic monetary policy and economic activity would?be unaffected.

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Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service