Hockey Injects A$8.8 Billion to RBA, Boosting Currency Options

Australian Treasurer Joe Hockey will inject A$8.8 billion ($8.5 billion) into the central bank’s depleted reserve fund, increasing its flexibility to tackle renewed currency strength.

The transfer will bring the balance of the Reserve Bank of Australia’s main capital buffer equal to 15 percent of its assets at risk, a level deemed by the RBA board as sufficient to place it in a strong financial position, Hockey said today in a statement. It currently stands at 3.8 percent.

“This injection of funds puts beyond any doubt the Reserve Bank’s continued ability to perform its core monetary policy and foreign exchange functions, in an environment of heightened financial market volatility,” Hockey said.

The RBA’s capital buffer has been depleted by the sustained strength of the Australian dollar, which weighs on the local value of its foreign assets. Governor Glenn Stevens urged Hockey’s predecessor to refrain from taking a dividend for the year to June 2012 to allow the central bank to rebuild the fund. Then-Treasurer Wayne Swan, in defiance of Stevens’s advice, requested and received a A$500 million payment from the RBA as the government sought to balance its books.

“The RBA now has more capacity to absorb unforeseen losses on foreign-exchange and bond holdings,” said Sally Auld, a interest rate strategist at JPMorgan Chase & Co in Sydney. “This will make some people consider whether the RBA are about to meaningfully up their foreign-exchange reserves or intervention.”

Shock Absorber

The reserve fund stood at A$1.9 billion, Stevens told a parliamentary panel in Canberra on Feb. 22. Hockey’s statement shows the balance at A$2.5 billion.

The Australian dollar has risen 9 percent since Aug. 30, the best performing group of 10 currency after New Zealand, as confidence indicators rebound and the U.S. Federal Reserve is expected to delay tapering.

The transfer will detract from the underlying cash balance in the 2013-14 financial year, Hockey said today.

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