Comments from HSBC (these are from prior to the Reserve Bank of Australia May meeting Minutes release) ... they say the RBA is "
quietly fighting a currency war"
The old 'currency war' headline is always a good one ... but HSBC do go on to make some important points that it would pay to heed,
- When you are only a small country you can only play a bit part ... The AUD is the fourth most traded currency in the world and over $400 billion is exchanged every day, direct intervention is not considered a serious option
- Although it is certainly technically feasible to hold down your currency, by selling sufficient quantities of it, it is costly, as assets are bought that yield a lower return. Just ask the Swiss.
- Without using the big guns, of direct intervention, the RBA is left in a tactical war
- One tactic is to "talk" about the fact that they see the currency as over-valued ... Market participants can think of this in at least two different ways
- First, the RBA is a very informed observer that is telling markets to expect the AUD to fall. With all the RBA's intellectual fire power, their view matters
- Second, if it does not fall, the RBA may choose to cut its cash rate further, reducing the yield on many Australian assets, particularly short-dated ones and making it less attractive to hold these assets.
