RBA intervenes to support the Australian dollar

Dow Jones Newswires reports that the Reserve Bank intervened to support the Australian dollar in Europe on Friday as it plunged to a five-year low of US60.57c.

The intervention was designed “to add liquidity in an illiquid market”, a spokesman for the central bank said.

The RBA last intervened to support the Australian dollar in mid 2007 when the onset of the credit crisis pushed the currency sharply lower.

The Australian central bank doesn’t target a level for the currency but intervenes to restore liquidity and smooth market volatility.

In early trading today, the Australian dollar had rebounded slightly. By 9.15am AEDT, it was quoted at US61.31c.

Against the US dollar, the Australian dollar has fallen by around 37 per cent since mid-year amid growing concern about the world growth outlook.

ANZ strategist Patricia Gacis said the intervention began when the currency slipped through US61c.

It was unclear how much the RBA spent as it dealt through a number of banks in the operation, she said.

Greg Gibbs, senior currency strategist at ABN AMRO, said if the intention of the RBA was only to add liquidity then the amount traded may not have been large.

“They probably didn’t need to do a whole lot in that environment,” he said.

Richard Grace, chief currency strategist at the Commonwealth Bank of Australia, said the Australian dollar market has been suffering from a severe lack of liquidity, which was why it has been “gapping whole figures” in recent weeks.

Mr Grace expects more pressure to be exerted on the Australian dollar this week as the end of the month approaches as investment funds adjust Australian-dollar hedges.

There is some speculation that Japanese investors are also pulling out cash from Australia, partly in reaction to recent moves by some fund managers to freeze redemptions.

The Australian dollar also plunged against the yen on Friday, dropping to around Y55 from Y66. By 9.15am, the cross rate was quoted at Y56.31.

Uncertainty surrounding the introduction of a government guarantee of bank deposits and wholesale funding has prompted moves by investors to shift savings out of unprotected cash management trusts into bank deposits.

In addition an AAP report says that the $A Dollar is tipped to drop below 60 US cents testing another five-and-a-half-year low by the end of this week as fears of global recession spur a sell-off, currency strategists say.

Against the currency of Australia’s biggest export market, Japan, the Australian dollar has fallen to its lowest level since the end of World War II.

Mr Grace said the Australian dollar could fall below Friday night’s low-point of 60.55 US cents, the weakest level since April 2003.

“The risk is it being lower than current levels by the end of the month,” Mr Grace said.

“We’re just unsure how low it could go.”  “There’s large risk of much more downside pressure.”

The Australian dollar has shed 39% since hitting a  25-year high of 98.49 US cents in mid July.

At the start of local trading at 7am AEDT, the Australian dollar was at 61.96 US cents, down almost two US cents from Friday’s domestic close of 63.91 US cents.

The currency has since dropped back to 61.30 US cents in morning trade.

Against the low-yielding Japanese yen, the Australian dollar fell to 55.10 yen on Friday night, its lowest level since the end of World War II, according to Reserve Bank of Australia (RBA) data.

The local currency has lost almost half, or 47%, of its value against the yen since late July.

Mr Grace said that with fears of a global recession in the minds of traders, the Australian dollar was likely to finish 2008 at 64 US cents, before dropping to 59 US cents by the end of March 2009.

“It’s coming from a selling of the Australian dollar according to downward revisions of global growth and commodity prices,” he said.

St George chief economist Besa Deda said the prospect of more rate cuts from the RBA and a continuation of financial market turmoil would weigh on the Australian dollar into 2009.

“The main reason for the downgrade lies with the deepening of the credit crisis and its knock-on effects to the economy, both the world and domestic economies,” she said.

“The mix of factors that will influence the Australian dollar lower also include a deterioration in the global growth outlook, particularly Asia, weaker commodity prices, heightened risk aversion, a slowing domestic economy, more rate cuts from the Reserve Bank of Australia and a continued period of general strength for the US dollar.”

Ms Deda said the Australian dollar was likely to hit 61 US cents by December, fall to 59 US cents in March and recover to 65 US cents in June 2009.

A Report by the Mole from Dow Jones and AAP