RBA Says ‘Unusual’ Aussie Moves May Exacerbate Lack of Liquidity

The Reserve Bank of Australia said foreign-exchange market liquidity may drop off further in the lead-up to its interest-rate decisions after sudden moves in the Aussie just before policy announcements.

An existing lack of liquidity at such times, combined with the rise of algorithmic trading, may have been behind suspicious moves in the local dollar in the seconds before the Feb. 3 and March 3 announcements, the central bank said Tuesday in minutes from its April 7 meeting.

Australia’s securities regulator is investigating trading in the Aussie that saw the currency move as much as 0.7 percent before each of the three monetary policy announcements this year -- and in every case the market’s move correctly anticipated the impact on the exchange rate of the RBA’s decisions.

“Members noted that the illiquid conditions that existed in the foreign-exchange market at that time meant that small trades could move the price by relatively large amounts,” the RBA said. “The occurrence of these movements meant that liquidity was likely to decline further as more liquidity providers pulled back from the market during this window.”

The minutes noted that RBA officials were aware of an ongoing investigation by the Australian Securities and Investments Commission, and that internal checks had not found “any evidence of procedural lapses or conduct that could have led to the early release of relevant information.”

‘Unusual Trading’

While policy makers discussed what they termed the “unusual trading in the Australian dollar” on the day of February and March rate decisions, the phenomenon was repeated before they announced the April 7 decision.

“The market will question whether that’s luck, or if there is something more,” said Sean Keane, an Auckland-based analyst at Triple T Consulting. Even so, “we know that traders are less prone to price-making close to big events, so that accentuates the illiquidity and the movements there.”

The RBA said that robot traders could have accelerate exchange-rate changes amid thin activity.

“Once such movements occurred it would be highly likely that algorithmic trading strategies would exacerbate such movements, particularly given the illiquid environment.”

The increase in the use of high-frequency trading has spurred concern that algorithm-driven orders can lead to distortions for stock, bond and equity markets around major data releases. Supporters of high-frequency trading say it makes markets more efficient.

Australia’s securities regulator said about a year ago it will conduct inquiries into the nation’s foreign-exchange market amid international probes of alleged manipulation of benchmark currency rates.

Robot Traders

Electronic trading platforms currently account for more than half of all spot trades in the $5.3 trillion-a-day foreign-exchange market, according to the Bank of England’s Quarterly Bulletin released March 12.

High-frequency traders may have at first exacerbated currency swings after the Swiss National Bank’s surprise decision to drop its euro cap in January, before helping to calm the market faster than would otherwise have been the case, according to the minutes from a meeting last month of global central bankers in Tokyo on March 23.

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