By Koh Gui Qing
SYDNEY, July 23 (Reuters) - Australia's central bank said last week it sold a record net A$1.9 billion ($1.6 billion) of Australian dollars in the currency market, feeding talk among investors that perhaps it thinks the Aussie has risen too far, too fast.
The Aussie has risen nearly 17 percent against the U.S. dollar so far this year as stabilising financial markets and hopes for a global economic recovery prompt investors to seek out higher-risk, higher-yielding assets again.
Here are some questions and answbers about the Reserve Bank
of Australia's (RBA) transactions in the currency market, and
their implications for the Aussie dollar
DOES JUNE'S RECORD SELLING OF AUSSIE COUNT AS INTERVENTION?
Yes and no, depending on who you talk to. To the RBA, its sales of the Aussie, in May and June, are efforts to "rebuild reserves" and do not count as intervention.
The RBA says it often acts as a money changer for Australia's government, supplying it with foreign currency to pay for transactions. When that happens, the RBA sells the Aussie to replenish its reserves. This usually happens every month.
That is not to say the RBA is not opportunistic in these routine trades. For instance, it said it made use of the Aussie's strength in June to sell more of the currency than it needed to.
To the market though, that is a form of intervention, and some investors think the RBA is signalling the Aussie is over-bought. Some traders suspect the RBA may still be selling the Aussie when it is around $0.8150.
"I consider it intervention," said Kieran Davies, chief economist at RBS. "The amount they are selling is so large that they are clearly leaning into the Aussie's strength."
WHAT IS THE RBA'S TRACK RECORD AS A TRADER?
The RBA made a profit of A$138 million in the financial year ending June 2008 selling foreign exchange, its annual report showed. That was the eighth straight year that it had made money from currency markets, though profits were also at their lowest level in eight years.
Still, the RBA's currency trades since the financial crisis suggests it will make a tidy profit this year.
It bought a record A$3.15 billion in October when the Aussie slumped to a 5-½ year low near 60 U.S. cents, and sold a record amount in June when the currency hit an eight-month high of $0.8263.
The RBA says it usually intervenes around the peaks and troughs of the Aussie's trading cycles.
WHY DOES THE RBA INTERVENE?
The RBA says it seeks to influence the value of the Aussie when it is not in line with fundamentals, or when markets are disorderly. Interventions are almost always focused on the Aussie's rate against the U.S. dollar.
The bank says the Aussie is judged to have "overshot" its value when it has moved a "long way" such that the exchange rate is not reasonable given economic and financial conditions.
It says it trades the Aussie by buying low and selling high, believing that this helps to stabilise the currency over time.
The RBA also intervenes to stabilise the market when it has become disorderly -- characterised by high volatility, sharply widening bid-ask spreads, or erratic movements.
It announced its last intervention in October at the height
of the financial crisis, after Lehman Brothers
The RBA bought a record A$3.15 billion then to stabilise the Aussie, which plunged 40 percent as investors fled riskier, leveraged trades.
It said it had intervened to provide liquidity because traders were unwilling to buy the Aussie as it went into free fall.
The RBA, however, states very clearly that interventions do not aim to defend a specific level of the exchange rate, unsurprising since the bank does not have the means to do so.
The RBA has around $48 billion in reserves, small beer compared the daily $175-billion turnover in Aussie trade, according to 2007 data from the Bank for International Settlements.
HOW DOES THE RBA INTERVENE?
That depends on how much the RBA wants investors to know it is in the market. The most low-key form of intervention is to get other banks to trade its orders, concealing the RBA's presence. It routinely buys foreign currency for the government and can tack on orders for its own account.
The most aggressive form of intervention entails the RBA phoning banks quoting bids or offers for the Aussie.
Banks that get a call from the RBA will be forced to shift their quotes to make them less attractive to avoid trading with the central bank. This pushes the Aussie in the direction that the RBA wants.
The RBA says over the years it has intervened less frequently but on a larger scale. The largest daily intervention was around A$1.2 billion in 2004, up from A$250 million in the 1980s.
Still, the scale the intervention belies its impact since talk of the RBA's presence in markets is enough to alter trading behaviours. The RBA calls this the "announcement effect". (Editing by Kim Coghill)