Aussie Wobbles as RBA Intervenes to Weaken Currency

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Peter Lavelle,
Foreign exchange broker Pure FX
15.11.2012

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The Australian dollar sank against the euro and US dollar this week, reversing a trend we've seen since the beginning of October, as the Reserve Bank of Australia expands its efforts to weaken the Aussie currency.

However, in spite of this, the Aussie nonetheless enjoyed minor gains against the UK pound, as Australian unemployment defied forecasts to hold steady at 5.4%.

What Affected the Aussie Dollar This Week

The Reserve Bank of Australia intervenes to weaken the Aussie

The chief reason the Australian dollar fell to the euro and US dollar this week is that the RBA is becoming increasingly serious about intervening to weaken the currency. New data shows that the central bank expanded its foreign reserves $457m in October, compared to $50m in all of Q2. The goal of course is to help Australia's economy, now that the mining boom is due to peak.

Why did this weaken the Australian dollar?

The RBA's action weakened the Aussie, because it means it's selling increasing amounts of Australian dollars to buy other currencies. That of course raises the supply of Aussie dollars on the market and, just like any other product, the more there is of it, the less valuable it becomes. However, if you intend to buy Aussie dollars, this now means you can expect a better Aussie exchange rate.

Australian unemployment unchanged at 5.4% in October

As I mention, the Australian dollar jumped against the UK pound this week. This reflects the fact that Australia's unemployment rate defied widespread forecasts to sit unchanged at 5.4% last month. This signals Australia's labour market is in better shape than most economists thought and, indeed, Australia still enjoys the lowest unemployment rate in the industrialised world.

Why did this benefit the Aussie against the pound?

Reports of Australia continuing low unemployment rate benefited the Australian dollar because it sends an upbeat signal about the nation's economy. If fewer people are unemployed, it of course tells us the economy is in good shape. That makes it an attractive place to invest, thereby increasing demand for Australian dollars, and helping the currency rise.

What's Going to Happen Next

I think there's a good chance of the Aussie continuing to fall against the euro and US dollar, and maybe even the UK pound too. This is because, unless the currency weakens, the RBA will become increasingly aggressive in its interventions, to aid parts of Australia hit by the strong Aussie, such as tourism and manufacturing. If you plan to buy Aussie dollars, that would be to your advantage.

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