RBC has released a warning to its clients to watch out for “buyer beware” as the market continues to fall.
In a note to clients this morning, RBC said foreign exchange investors are seeing a “buy” in the market.
“We’re seeing a lot of buy buying activity in the foreign exchange market, and this could have implications for foreign exchange clients as well as their portfolios,” said the note.
It continues: “Some of these funds are in the process of selling, meaning that the foreign-exchange market may be overbought at this point.”
“The longer the market stays weak, the less risk that the market will come back stronger.
We expect this trend to continue until the market recovers from this weakness.
RBC warned that foreign exchange traders are becoming increasingly concerned about a decline in foreign exchange prices as a result of a stronger dollar, which has reduced the value of the Australian dollar compared to the U.S. dollar.
Foreign exchange volatility is also expected to impact Australian dollars over the next few months.
As a result, it said foreign currency and foreign-asset managers may need to reassess the value and risk-weighted exposure to their clients.
A strong dollar means higher interest rates, higher borrowing costs and increased financial volatility, and higher inflation, the note added.
However, RBA Governor Glenn Stevens told Parliament this morning that the Reserve Bank had been taking the view that a stronger Australian dollar and a weaker Australian dollar-denominated currency would reduce the likelihood of an Australian economy continuing to recover from the global financial crisis.
While the economy is recovering, the outlook for Australia’s financial situation remains uncertain, Mr Stevens said.
He said that as the economy recovers, the Reserve Board will be closely watching developments in the broader global economy.
The Reserve Bank’s chief economist, John Rau, said last month the economy could have a strong impact on inflation, as inflation is expected to be below 2 per cent.
If that is the case, the RBA may need additional support from the Reserve to offset the impact of a weaker currency, he said.”
But the question is: how much more support is needed?” he said at the time.
But Mr Stevens suggested that the RBS could use its balance sheet to support the economy.”
If we look at the balance sheet as a whole, the balance is very much in favour of the economy,” he said in a speech to the Reserve House.
And he said the Bank was keeping its sights on its foreign exchange portfolio.”
As long as the domestic and international markets remain weak, it is not the time to buy into foreign exchange.
If the global economic outlook improves, and we think it will, we will likely be in a better position to buy in the domestic market.