The Relationship Between the Trading Activities of the Reserve Bank of Australia and Movements in the Value of the Australian Dollar

This paper explores the relationships between changes in the value of the Australian dollar and the trading activities of the Reserve Bank of Australia over the ten year period December 1983 through December 1993. In particular, it identifies the existence or otherwise of Granger-causality between returns and trading activity at various sampling intervals. The following results are obtained: knowledge of the daily trading activities of the Reserve Bank improves the prediction of the daily returns gained by holding the Australian dollar. On the other hand, if weekly data is used, the direction of 'causality' is reversed: knowledge of weekly returns improves the prediction of the weekly trading activities of the Reserve Bank. The analysis of monthly data finds no evidence of Granger-causality in either direction: knowledge of monthly returns does not improve the prediction of Reserve Bank trading activities, and knowledge of the monthly trading activities does not improve the prediction of monthly returns gained from holding the Australian dollar. An attempt is made to infer Reserve Bank trading policy and its effectiveness. Although a case can be made that the Bank uses weekly movements in the value of the dollar as an input into its trading decisions, our analysis suggests that Reserve Bank trading affects the movement of the dollar on a short (daily) time scale only; ultimately, market forces prevail over longer time periods. © 1997 JAI Press Inc. All rights of reproduction in any form reserved.