The Reserve Bank of Australia (RBA) has taken a huge hit from the Aussie dollar’s meteoric rise, resulting in its biggest ever loss of $A2.9 billion for the 2009/10 year.
A $A3.8 billion dollar forex hit has also exhausted the bank’s contingency fund, which will need to be rebuilt.
The Aussie dollar briefly hit parity with the long-suffering U.S. dollar on October 15 for the first time since foreign exchange controls were removed in 1983.
A strong local currency makes life tough for Australian entities with foreign exchange exposure – the central bank included.
Writing in the bank’s annual report, RBA Governor Glenn Stevens said the rise in the exchange rate had a major effect on its result.
The RBA, as the custodian of Australia’s official foreign reserves, has a large open foreign currency position.
In years when the Australian dollar changes against the currencies of countries in which the reserves are held – the United States, Japan and the euro area – the value of those assets measured in Australian dollar terms changes.
In 2008/09, as the Australian dollar fell, these valuation effects were strongly positive, and the bank’s earnings were consequently the highest in its history.
But the bank has in the past pointed out that it has a large forex exposure that could one day result in a loss in the event of a big rise in the Aussie dollar.
“That is precisely what occurred in 2009/10, just as it had in
2006/07,” Mr Stevens said.
The valuation loss arising mainly from the rise in the exchange rate amounted to $A3.8 billion – the biggest the bank has ever experienced.
Underlying earnings – at $A866 million in 2009/10 – were also lower than normal because of the low level of global interest rates. The total loss came to $A2.9 billion.
The RBA’s valuation losses are absorbed by any unrealised valuation gains from earlier years, which are retained in a reserve. Any remaining loss beyond the capacity of this reserve is charged against the Reserve Bank Reserve Fund.
The bank will seek to rebuild the fund over coming years by making transfers from future earnings.
Fri, 29 Oct 2010