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Costs outweigh benefits for RBA intervention in rampant Aussie

There is a growing disconnect between Reserve Bank of Australia (RBA) displeasure in the recent rise in AUDUSD and expectations in the market that central bank intervention is unlikely.

In June, AUD broke back above parity with USD and has since risen to $1.0550, as speculators have worked to enhance their long AUD positions, according to recent Commitments of Traders data from the Commodity Futures Trading Commission. Last week’s IMM report shows the total of AUD long contracts reached a new record of 103,870, worth $10.962 billion in notional terms, with the short side coming in at 34,000 contracts worth $3.648 billion. That left the net long position at $7.3 billion.

“This is not quite a record … but it is close,” says Citi analyst Greg Anderson. “Leveraged funds’ pen interest [longs plus shorts] in AUD was $14.6 billion worth, which is ahead of JPY at $13.8 billion and miles ahead of GBP [$6 billion] and CAD [$5.6 billion].

“I don’t think that AUD is in a speculative bubble, but for those who do think so, today’s [IMM] report will add fuel to the fire.”

 Net positions in AUD of IMM leveraged funds
(USD notional equivalent) and AUDUSD

Source: CFTC, Bloomberg, CitiFX 

On Friday, the RBA raised its 2012 growth forecast for the Australian economy on stronger-than-expected consumer demand, adding that sustained AUD strength “may be more contractionary for the [Australian] economy than historical relationships suggest”.

However, if the RBA were to intervene in AUD to stem the flow of its recent rise, the central bank would have to spend an average of some A$1.52 billion per day to defend a desired AUD level, Commonwealth Bank of Australia states in a report on Monday.

“The Swiss National Bank is spending an average of approximately CHF0.54 billion [A$0.43 billion] per day intervening to prevent CHF from appreciating vis à vis the EUR,” CBA states. “It is important to note that daily turnover in the AUDUSD foreign exchange market is $249 billion per day, some 3.5 times the size of daily turnover in the EURCHF market.”

Bank of New York Mellon FX strategist Neil Mellor says the recent strength in the Aussie fits well with theories in the market of reserve bank diversification activity.

“Time and time again we’ve learned from China that they are looking to diversify their currency holdings without officially announcing as such, and there are still reasons why the EUR and USD are going to remain centre stage, as far as the Chinese are concerned,” says Mellor.

“At the same time, there is an inevitable spillover into other currencies such as AUD. It would seem there has been a change in focus as far as the Aussie is concerned [for the market] – it’s not just a risk-on currency anymore.”

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