Reserve Bank of Australia (RBA)



Some of you may not have heard of the Reserve Bank of Australia (RBA).

You’re likely well acquainted with Australia, the land of the Tasmanian devil, Kangaroos, and many other wonders (vegemite, anyone?).

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But what about the RBA?

Well, let’s start with the basics.

What's the Reserve Bank of Australia?

It’s the Central Bank of Australia.

That’s it. You don’t have to read any further…

What? You want more?

Hmmmm. Ok, ok…

As the Central Bank of Australia, the Reserve Bank of Australia (RBA) is in charge of the Australian Dollar (AUD).

The AUD is one of the most transacted currencies in the world, being part of the major eight currencies.

As such, knowing what’s up with the RBA and the AUD will place you in a position to make some pips!

The AUD usually sees more action in the Asian session, since that’s when most pertinent announcements and news are released.

RBA Mandate

So what’s the RBA’s mission?

And why does it matter?

It matters because it will help you keep an eye on what the Bank cares about, and as such, it will help you anticipate what’s going to happen.

Good anticipation leads to profit, so let’s jump into the mandate itself.

Goal, mission, mandate. What’s the RBA’s?

According to the official website of the Reserve Bank of Australia:

“…to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the bank… will best contribute to:

a.    Stability of the currency of Australia;

b.    Maintenance of full employment in Australia;

c.    Economic prosperity and welfare of the people of Australia.”

That’s a very roundabout way of saying the RBA cares about:

1.    Inflation

2.    Labor Market

3.    Growth

That’s right, this Central Bank deeply cares about all three (not that the others don’t at all…).

The RBA wants to see this across the Board.

What does this mean?

It means the RBA’s rate decisions are more data dependent (more variables to watch before making a decision).

And thus, data releases can be more price-moving.

But is this true in practice?

While it’s true that a wider range of data releases are more important, the Bank’s decisions will hinge more on how the overall picture is shaping up.

More on that later.

RBA's Structure

The Reserve Bank of Australia is a Central Bank independent from the Central government of Australia (they make their own decisions).

Monetary policy decisions are made by the Reserve Bank Board.

This Board is comprised of nine members, but needs only five to be present to pass a decision.

Australian Dollar (AUD). The Reserve Bank Board decides its supply to the rest of the world.

The Bank’s Governor is automatically appointed to the Reserve Bank Board, as is the Deputy Governor.

The Board meets eleven times per year, on the first Tuesday of every month, with the exception of January.

Rate decisions are agreed upon by votes (not unusual huh?).

So now you know, every single month (except January) you have an opportunity to make some serious pips.

Exciting, isn’t it?

FX and the Reserve Bank of Australia

If we put this together what do we get?

This Central Bank will care about the overall economic picture, but in practice, this difference in mandate doesn’t make it THAT much different.

Why?

You will still have periods in which most of the economy is doing well, but there is a lagging variable.

For example, let’s say the labor market is tight, and GDP is growing, but inflation is below target.

In this case, the Bank may prefer to wait for inflation to pick up before raising rates.

In this case, it’s easy to see how CPI releases will be much more market-moving than say, the unemployment rate.

Conversely, we could have the exact same scenario, but with the RBA not being concerned about inflation.

In this case, the Bank may state it will continue with its intended actions since it doesn’t deem inflation to be an issue (as in transitory reasons for low CPI readings).

In that case, CPI would need to be too strong, or too weak to make a good dent on currency prices.

But you already knew some of this.

Anyways, good luck,

Emil Christopher,

The Forex Economist

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