What central banks are intervening in the market to support the Australian dollar, and what does it mean for gold?
All week we’ve been building up the argument that the Australian gold price is due for a big move because the Australian dollar is not supported by the fundamentals (a terms of trade off a 140 year high, lower iron ore and coal prices, lower global growth). But we did not reckon with the resolve of the Swiss National Bank (SNB)!
Late last year the Swiss decided they would not tolerate a strengthening of the Swiss franc against the euro. This had important implications for the Australian dollar. As you can see from the chart below, the franc steadily appreciated against the euro as US subprime crisis evolved into a European government debt crisis. Swiss exporters cried foul as money fled from the euro into the franc, driving up the price of Swiss goods globally. A line in the sand was drawn.
Swiss Franc Weakness is Australian Dollar Strength
To keep the franc/euro exchange rate at 1.20, the Swiss national bank must print its own currency and buy others. Swiss foreign exchange reserves have grown to 406 billion francs ($420 billion) since it began the intervention. Swiss forex reserves are now 71% of GDP, according to Bloomberg.
What does the SNB do with all that new currency? Well, it buys at least €100 billion for starters. And then it buys a couple hundred million Australian dollars, according to Joanna Heath in today’s Australian Financial Review. The SNB, along with the Bank of Japan and a bevy of other central banks, is buying the Australian dollar even as the economic data that’s supported the dollar weakens.
The Reserve Bank of Australia noted as much yesterday. The RBA declined to make any change to the price of money in Australia (don’t worry, it’s not out of modesty…the Bank still believes it knows exactly how much credit should cost). The minutes from the RBA’s most recent board meeting tell the story:
‘The further decline in the euro exchange rate put additional pressure on the Swiss National Bank in maintaining the franc’s peg against the euro to avert deflationary pressures. Members noted that the Swiss National Bank had purchased around €100 billion over May and June, with further sizeable purchases likely to have occurred in July. While some of these purchases were retained in Euros, a sizeable share was converted into other currencies, including a modest amount in the Australian dollar. In contrast, members noted that the level of Chinese foreign reserves fell in the June quarter, as capital outflows occurred.’
That last bit, by the way, that capital is moving out of China, is worth exploring. But not today. Today, we only want to make the point that in the world of freely floating currency exchange rates, strength is always relative. And now that former Treasury head Ken Henry has said the Australian dollar could stay high for the ‘foreseable future,’ we’re more confident than ever that gold will close higher this year in Aussie dollar terms.
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From the Archives…
Staring Down the Barrel of Bad Debt
17-08-2012 – Greg Canavan
Taking Over From the US Dollar With Organic Finance
16-08-2012 – Greg Canavan
Australian Banks on the Run
15-08-2012 – Bill Bonner
The Secret Investment to Buy When GDP Falls
14-08-2012 – Nick Hubble
Will the Latest Data From China Cause a Rally in Aussie Stocks?
13-08-2012 – Dan Denning