Dirty Deeds Don’t Come Cheap
Australia is a developed country that is known for its natural resources and high-tech industries. This makes the Australian dollar popular among investors. The currency also holds an important position as a reserve asset in the global economy.
The Australian Dollar roared to a 10-month high last week on expectations that the Federal Reserve might be easing its hawkish stance, but this week it is expected to hike rates by another 25 basis points (bps). The central bank raised its cash rate for the first time in more than a decade and the market is expecting it to continue hiking until November.
With the RBA’s latest move, it remains in a race with other global central banks to raise interest rates until demand is suppressed enough to take the heat out of inflation. This may create a drag on national productivity, which could lead to lower standards of living in the long run.
In the meantime, Australia’s unemployment rate has been on the decline and its economy is growing at a steady pace. However, Australia’s economy still faces many challenges and a sustained weakening of the Australian Dollar is not unthinkable.
While the Aussie Dollar has climbed against other major currencies in recent years, it has remained relatively flat against the US dollar. This trend is likely to continue, with the Fed’s recent hawkish stance only adding to the pressure on the currency.
The Australian Government has a large foreign exchange trading market, which is managed by the Reserve Bank of Australia (RBA). The RBA conducts monetary policy to meet a target for medium-term inflation and to promote economic prosperity and stability in Australia.
It is also responsible for managing Australia’s gold and foreign exchange reserves. In addition, it issues banknotes and conducts market operations to keep the supply of Exchange Settlement (ES) balances at a reasonable level.
Repo: The ES market is open for business and is managed by the Reserve Bank of Australia through its Open Market Operations (OMO). Repos involve the purchase of high-quality collateral securities to increase the supply of ES balances in the system. These include bonds issued by banks and asset-backed securities.
These transactions are conducted in the overnight market and are intended to ensure that the cash rate is traded at its target. They are also used to manage market liquidity and maintain a smooth flow of funds in the system.
OMO: The Open Market Operations system is designed to provide the RBA with a stable and liquid funding source. The system is operated through a number of different types of transactions, including repo and swaps.
Repos are the most common type of transaction. These transactions require the RBA to provide cash for the purchase of high-quality collateral securities. These securities are usually issued by the Australian Government, Australian states and territories and some approved international sovereign and supranational issuers.
Swaps are similar to repo but allow the Bank to swap Australian dollars for foreign currencies. This helps to create more ES balances and improves the supply of a wider range of currencies in the system.
