28 Feb 2013

Australia central-bank documents strip some mystery from currency

Sarah Turner: The Reserve Bank of Australia issued a clutch of documents on Thursday under the Freedom of Information Act in which it gave its opinion on everything from which of the world’s central banks are holders of the Australian currency to whether the Aussie dollar is overvalued.
According to the RBA, neither the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England nor the Bank of Canada have Australian dollars (or in other words, Australian sovereign bonds) in their vaults.
The RBA said it was their “best guess” that none of the above monetary authorities – as well as another 16 central to boot – hold the Australian currency, though they cautioned that “timely, reliable information is quite difficult to come by.”
At the same time, the RBA said another 16 central banks have publicly reported that they hold Australian dollars, while a further 18 “appear to hold Australian dollars.”
In the RBA’s Australian-dollar-holder category were the monetary authorities of Hong Kong, Switzerland, Brazil, the Russian Federation and Sweden. In the “maybe” category were those of China, France, Germany, India and Indonesia. The “unknowns” included Greece, Bulgaria, Portugal, Spain and Egypt.
But the RBA shied away from any definitive statements on who holds its currency now, warning that “any recent changes in reserve composition will not be reflected,” given that the data were collected from central-bank annual reports, “in most cases for 2011.”
Foreign central banks were believed to be buying the Australian dollar for its yield, as the interest rates on the Australian debt that the central banks would hold are often much higher than those of many other countries.

In another document, dated August, the RBA released its opinion on whether the Australian dollar is overvalued.
The RBA’s view: “Currently, the high Australian dollar is probably a bit above the level justified by fundamentals, given the recent decline in the terms of trade and deterioration in the global economic outlook. However, it is not clear that the Australian dollar is substantially overvalued.”
“Most models that we tend to focus on suggest the Australian dollar could be 4%-15% overvalued,” the central bank concluded.
In December, a letter from an unnamed RBA senior analyst had said the Australian currency was overvalued by around 7%, using the bank’s own preferred models.
The newly released documents also touched on the question of whether intervention in the foreign-exchange markets was an appropriate action to bring down the Aussie’s value.
The RBA issued a document last August comparing Australia’s situation to that of Switzerland – which last year did intervene to halt a sharp appreciation in its currency.
The situation between the two countries “cannot yet be considered comparable. There is not strong evidence that the Australian dollar is posing an imminent threat of devaluation or is highly contractionary for the domestic economy,” the RBA said at the time.
“The Australian economy is less exposed to external developments (particularly in Europe) than the Swiss economy,” the RBA said.
The Australian dollar CUR_AUDUSD +0.06% traded at $1.0278 on Thursday afternoon, up from $1.0235 in late North American trading on Wednesday.
It has mostly traded above parity with the U.S. dollar since late 2010, though it has occasionally dipped below the $1 mark, doing so as recently as last summer. Prior to 2010, however, one Australian dollar was reliably worth less than its U.S. counterpart, even dipping below the 50-U.S.-cent mark for a brief time in 2001.
You can see the full text of the documents here.


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