Given recent movements we might have a volunteer.  RBA assets first bottomed in the week of 20Jan10 – rose with the market selloff at the time – bottomed at a higher low in the week of 7Apr10 – and have been rising progressively as the market wobbles have set in.  Hmm.

]]> http://www.datadiary.com.au/2010/05/24/rba-balance-sheet-time-to-get-bigger-again/feed/ 0 http://www.datadiary.com.au/2010/02/23/the-return-of-the-rbas-balance-sheet/ http://www.datadiary.com.au/2010/02/23/the-return-of-the-rbas-balance-sheet/#comments Tue, 23 Feb 2010 04:21:26 +0000 Rohan Clarke http://www.datadiary.com.au/?p=1440 The RBA responded to our request for information on the drivers behind the decline in RBA assets through 2007 – they published a piece on the topic in February 2008 (click here to read the article in full – while our our original article is here).

Pretty clear explanation – they note that the RBA has been using FX swaps as a liquidity management tool for some time. Historically, Commonwealth Government Securities were their instrument of choice – to inject liquidity they would borrow securities from the market.  As the volume of these has dried up (until recently anyway), the RBA turned to the FX swaps market to assist – effectively borrowing foreign currency instead of government securities.  Eminently sensible really.

So why the fall in FX reserves across the second half of 2007? Two reasons:

1. The Futures Fund started investing its cash – they had a rather lumpy deposit with the RBA pending investment opportunities arising.  Appears they saw some value emerging as the meltdown got under way.
2. In an effort to ‘ease liquidity pressures in the domestic money markets’, the RBA found itself the recipient of all kinds of securities under repurchase agreements with Australian banks.  They closed out the swaps because they were providing the liquidity by borrowing securities in the domestic market.

So the question then is what is the ‘new normal’, that is, what is the post-Futures-Fund operating level of RBA assets?  If we can form a view about that, then we have a benchmark to measure against and a fair indicator for changes in liquidity in the Australian economy.

I actively watch this chart and a colleague of mine updated it today. RBA balance sheet collapsed in early part of 08 ahead of the debacle.

And the chart:

Can’t argue with the statement – the RBA’s assets did collapse.  But what, if anything, is the cause and effect?

The movement in the RBA’s assets can be summarised in the following chart:

The cause of the fall in the RBA’s assets was a drop in Gold and FX reserves.  Taking a deeper look inside the RBA’s trousers (not for the faint hearted), between July and December 2007, the RBA delivered over A$50bn into swap contracts – thereby reducing it’s foreign exchange reserves.  The question is why?  And it’s something that has me stumped…It’s a pertinent question given the more recent decline in FX reserves again.

While I’m playing in the nether regions, an interesting sidenote on the financial crisis.  Once the liquidity vacuum was sucking at the markets, the RBA’s holdings of other securities (that’s be the MBS etc that couldn’t find a home) more than doubled from $32bn in Feb08 to $70bn by Dec08 while total FX denominated assets (inclusive of foreign securities) also climbed from Sep to Nov 08 from $46bn to $93bn.  This was funded by a combination of the US Fed’s US$30bn swap line and cash collateral from the ADI’s that were taking advantage of the funding.  These have all but normalised over recent times (with the swap facility with the US Federal Reserve being wound up in February this year).  Seems like it’s back to business as usual.  So is the decline in FX reserves telling us anything?