The Return of the RBA’s Balance Sheet

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 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 underway.
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.