RBA quietly sells Australian dollar
Whatever you do, don't call it intervention. But the Reserve Bank has been a net seller of Australian dollars over the past month, buying foreign currency in excess of the government's needs for the first time in years.
"I wouldn't call it intervention, I would call it a convenient coincidence," says UBS' Scott Haslem. "In October the bank bought $330 million of foreign exchange over and above what it would normally buy for government transactions.
"It's clear from its own figures. It bought $648 million in total and only $318 million on behalf of the government. It was a solid seller of Australian dollars in excess of need for the first time in four years."
The finding came as RBA deputy governor Philip Lowe held open the option of intervention to force the dollar down.
"In the past we have been prepared to intervene in the currency market when it was clear the currency market was misaligned or not working well," Dr Lowe told a Sydney conference.
"The threshold for intervention is very high, and it is not something that we would rule in or out."
Foreign exchange traders focused on the observation that the threshold for intervention was high and pushed the dollar up a third of a US cent to the day's high of US91.98¢. The currency closed at US91.86¢, up half a cent from Monday's US91.30¢.
Mr Haslem said the most likely reason the RBA had been selling dollars in excess of the government's requirements was to rebuild foreign exchange reserves.
In October Treasurer Joe Hockey promised to transfer $8.8 billion to the RBA to rebuild its reserve fund. The RBA typically holds 56 per cent of its assets in foreign exchange and the rest in Australian dollars.
A rough calculation suggests it will need to convert $5 billion in Australian currency to foreign exchange in order to maintain the ratio. The $330 million of excess foreign exchange purchases in October would be just the start.
"If so, we will see more of it," said Mr Haslem. "If it pushes down the dollar the bank won't mind, even though that is not why it is doing it."
Dr Lowe told the conference Australia's two decades of strong income growth were coming to an end. Weak productivity growth, sliding terms of trade and demographic changes would result in slower growth in years to come, he said.
Without a lift in productivity Australia would "need to adjust to some combination of slower growth in real wages, slower growth in profits, smaller gains in asset prices and slower growth in government revenues and services - in short, slower growth in our average living standard," he said.