The Reserve Bank has moved to try and solve a shortage of US dollars in the Asian area by joining a swap arrangement involving the US Federal Reserve.
The shortgage of US dollars outside the US has continued despite moves by the Fed to inject more into the global economy.
The RBA has joined central banks from Norway, Sweden and Denmark in setting up a US dollar swap arrangement with the Fed totalling $US30 billion and lasting until at least the end of January 2009.
The RBA said currency swap lines have been set up between itself, the Fed and the Denmark, Norway and Sweden central banks – Danmarks Nationalbank, Norges Bank and Sveriges Riksbank.
"The swap serves to alleviate a shortage of US dollar liquidity which has affected market participants around the world including in the Asia-Pacific time zone," the RBA said.
That’s part of a global shortage which saw short term rates in Europe for US dollar loans soar overnight to their highest levels since January.
At the same time, rates on US Government three month T-notes again fell sharply as banks and othert investors chased security while the $US700 billion bailout plan was being debated in Washington.
The rates are not as low as they were a week ago when markets frayedf, but they are heading that way, indicating a sharp contraction in the availability of US dollars.
Hence the series of US dollar swaps the Fed has conducted in the past week with central banks around the world.
The US dollars will be made available, against collateral, to local market participants by the RBA through an auction, the first of which will happen tomorrow.
The term of the initial swap will be 28 days.
Subsequent auctions will depend on market conditions.
The RBA did a $1 billion US dollar swap last Thursday to try and pump extra American dollars into the market to accommodate demand from fund managers and others looking for greenbacks for end of quarter transactions.
"These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets," the RBA said in a statement that was released simultaneously with a similar notice from the Fed.
"Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises."
The Fed said in its statement that the swap lines it will have with the RBA, Denmark Norway and Sweden central banks are a $US30 billion addition to the $US247 billion previously authorised temporary swap arrangements with other central banks announce earlier this month.
"In sum, these new facilities represent a $30 billion addition to the $247 billion previously authorized temporary reciprocal currency arrangements with other central banks: European Central Bank ($110 billion), Bank of Japan ($60 billion), Bank of England ($40 billion), Swiss National Bank ($27 billion), and Bank of Canada ($10 billion)," the Fed said in its announcement.
In a separate announcement the RBA said that it will establish a domestic term deposit facility to further enhance the flexibility of domestic liquidity management operations.
"To further enhance the flexibility of its domestic liquidity management operations, the Reserve Bank will offer a short-term deposit facility (to be known as RBA Term Deposits)," it said.
The facility will be available to institutions holding an exchange settlement account and to authorised deposit-taking institutions.
The RBA will conduct auctions at which eligible institutions will be able to bid for deposits.
The first of auction, for a deposit of 14 days, will be held next Monday, September 29.
It will be run in addition to the current system of injecting funds each morning via repurchase deals involving government bonds and other securities as well as asset backed commercial paper and residential backed mortgages.
The offer to take short-term deposits from banks and financial institutions is going to be aimed at mopping up liquidity from banks, as part of its domestic operations.
Analysts said the bank is trying to attract some of the excess overnight funds that banks are holding as they refrain from lending to each other at the moment because of the credit crunch.
That has led to a spike in term-money rates, especially in three month bill rates. They are above the rates for 180 day paper: 7.43% versus 7.34%. This has been happening since the start of the month
The RBA yesterday $815 million in repurchase agreements, compared to an estimated cash deficit of $612 million. It drained a small amount on Tuesday, but resumed pumping in extra cash on yesterday as interbank lending rates remained high.
