International Market Operations

The Reserve Bank undertakes transactions in the foreign exchange market on a regular basis. Many of these transactions arise out of the provision of foreign exchange services to clients, with the Australian Government the Bank's largest client. Transactions are also undertaken in managing Australia's foreign currency reserves. Foreign currency reserve assets are held on the balance sheet of the Bank, with the currency allocation, asset allocation and interest rate risk on investments managed against benchmark targets.

Transcript

Guy Debelle, Assistant Governor (2007 – 2016)

The Bank has two roles: it operates in the domestic market and it operates in international markets.

The Bank owns the country's foreign exchange reserves, they are actually on our balance sheet, and we manage them on behalf of the country.

We operate in the foreign exchange market for two reasons. One is to give us the capacity to intervene in the market when conditions require. So, for instance, in 08/09 conditions in the foreign exchange market here and globally deteriorated; liquidity was very sparse and we stepped in to provide liquidity into that market. The intervention episodes are generally fairly few and far between. We haven't intervened or felt the need to intervene in the market since 08/09.

We also operate in the FX market every day of the week, because we do the Government's foreign exchange transactions for them. So every day, if the Government needs to pay some bill in foreign exchange, we'll provide money to an embassy offshore. We provide that money to the Government out of the foreign exchange reserves. We then go back into the market and replenish the foreign exchange reserves back to where we want them to be.

So the idea in managing the reserves is that we hold reserves to have sufficient liquidity for us to be able to intervene in the market when we need to. Normally we're not going to get a lot of advance notice of that, so the reserves have to have a certain degree of liquidity. Besides that, we aim for a diversity across the portfolio and that the portfolio has only the highest credit.

We hold roughly half of the portfolio in US dollars, about 30 per cent in Euro and then some in Japanese Yen, the Canadian dollar and the RMB, which we've only started investing in relatively recently.

We have a global operation. All our domestic operations are done out of the Sydney office, but we have offices in New York and London to manage the foreign exchange reserves portfolio. So the US dollar and the Canadian dollar portfolio are managed out of New York, the Euro portfolio is managed out of London, and then the Yen and RMB portfolio and the oversight of the portfolio as a whole is done out of Sydney.

So just like in the domestic market, we're transacting in those global markets every day. For instance, we hold about half of our portfolio as I said in US dollars; most of them are in US Treasuries, so we're dealing in the US Treasury market every day which gives us direct insight as to how the market is functioning. Similarly, in the FX market, because we're transacting in the market every day of the week, that gives us a good insight into how conditions are unfolding in that market.