A$ Eases from Near 5-month High; Why RBA Intervention is Unlikely

By Chris Gore | August 07 2012 10:18 PM

True to recent form, the Euro remained buoyant overnight alongside equity markets from both side of the Atlantic. Although we've seen moderate support for the Euro, it's failed to make a sustained break through short-term resistance just above 1.2440 and the 55-day moving average at 1.2415. Despite moderate support from risk trends, Spanish bond yields begun to climb higher as markets ponder the likelihood of Spain forgoing their fiscal sovereignty in exchange for financial assistance. Nonetheless, we've seen this theme of residual support from last week's ECB meeting guide markets. There remains an element of blind faith the European Central Bank will indeed "do whatever it takes to preserve the Euro" but given little else is known on the finer points, it's clear any short-term strength is tentative.

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The Australian dollar eased lower over the course of trade after testing 106 US cents yesterday afternoon. As widely anticipated, yesterday the RBA kept benchmark interest rates steady at 3.5 percent yesterday and maintained their 'glass half full' view of local conditions. While acknowledging significant challenges faced in the euro region and a subdued growth global growth outlook, on balance, the statement painted a fairly positive picture. On China, the statement noted growth has moderated to a more sustainable pace, but "does not appear to be slowing further." Local inflation is expected to be in line with expectations and business credit has recorded its strongest growth in several years. On the Australian dollar, the statement simply highlighted the local unit has remained resilient despite a marked decline in the terms of trade and weaker global growth outlook. If you look hard enough, the fact that they highlighted this disparity between fundamentals and price action may suggest they are concerned about the high level of exchange.

For those who regularly follow the day-to-day comment of the financial press will no doubt of heard the word 'intervention' thrown around in recent days with respect to the strong Australian dollar. In essence, unlike the monetary authorities of Switzerland and Japan, history suggests we're unlikely to see the bank use its clout to influence exchange rates. While we can 'never say never', higher rates of exchange have in the past failed to prompt the RBA to engage in currency intervention and are unlikely to do so again. The bank also noted in a bulletin published last year, currency intervention is used to address "periods of market dysfunction" which implies periods of extreme volatility caused by both natural and market based adversity, such the early days of the financial crises. The last time the RBA intervened was in the wake of the Lehman's collapse in 2008 which saw extreme levels of volatility and highly illiquid conditions. This demonstrates the type of "market dysfunction" reserved for exchange rate intervention. More importantly, the Reserve Bank explained the intervention was required to "provide more liquidity into a illiquid market," not a direct attempt to influence the overall level of the rate of exchange.

Local releases today include data on Home loan activity in June. The next major scheduled event risk for the local unit is Thursday's inflation data out of China and Australian employment data, also on Thursday. At the time of writing the Aussie dollar is buying 105.52 US cents.

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