Australia Central Bank Intervenes in Currency: Is it Worth the Effort?

For the third time, the Reserve Bank of Australia has intervened to support its currency which has dropped to a 5 year low against the US dollar.

Over the past month, the AUD/USD has fallen 25 percent against the greenback and 35 percent against the Japanese Yen.

As much as we applaud RBA Governor Glenn Stevens’ efforts, non-coordinated currency intervention rarely works.

Intervention has rarely resulted in a medium term top or bottom in a currency pair. We last saw that with the the Reserve Bank of New Zealand intervention in June 2007. The NZD/USD sold off for 200 pips, but it then quickly recovered those losses and went on to hit a 25 year high 2 months later.

NZD/USD Chart – June 2007 Intervention

The only way for intervention to work would be if it was coordinated with the Federal Reserve, the Bank of Japan and the European Central Bank. Although the BoJ may agree to yen weakness and Aussie strength, the Fed and ECB may not.

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