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G.I. Joe bailing out the RBA?

“We shall not flag or fail… We shall fight them on the beaches….”

In tones reminiscent of British wartime Prime Minister Winston Churchill, Treasurer Joe Hockey recently fended off suggestions that the federal government was bailing out the Reserve Bank of Australia (RBA) with a cash injection of $8.8 billion. The grant is designed to increase financial market confidence in the RBA’s capacity to implement monetary policy and manage its foreign exchange reserves.

RBA governor Glenn Stevens requested this amount to boost a crucial financial buffer, known as the reserve fund, to the equivalent of 15% of assets at risk, from its dangerously depleted 3.8%. This will likely blow out the federal deficit this financial year to at least $40 billion. The fund is highly sensitive for the RBA, which does not want to be left vulnerable to a perception that its reserves are inadequate.

Mr Hockey denied it was a bailout, while simultaneously conceding that the money would have to be borrowed and would deal a “significant hit” to the budget. All this at a time when the government is desperately seeking measures to reign in debt.

The rhetoric continued to flow, with Mr Hockey adding, “We need all the ammunition in the guns for what’s before us”, and “our institutions must be at their absolute strongest to deal with the challenges in the days, the weeks and the months ahead.” In a final defence of the realm, he implored, “We are not going to allow Australia to become in any way as ­vulnerable as the United States, or some other jurisdictions may be, over the months and years ahead.”

These portents of doom did little for either equity markets or the Australian dollar. After the release of higher than expected inflation figures last week, the currency had reached 97.58 cents only to fall to 96.25 in a just over one hour of trading.

The money boosts a crucial internal financial buffer – known as the reserve fund – to the equivalent of 15% of assets at risk, from 3.8%.

Foolish takeaway

I prefer to buy stocks with at least two tailwinds at their back. The most recent reporting season threw up a number of internally generated company turnaround scenarios. A subset of these companies included commentary on the additional benefits of a falling Australian dollar.

These included Sonic Healthcare (ASX: SHL), SAI Global (ASX: SAI) Fortescue Metals Group (ASX: FMG) and Beadall Resources (ASX: BDR). The first two have been constrained by a rising dollar to date, but the second two have continued to rally.

Outside this subset are the other beneficiaries of a weak dollar such as Rio Tinto (ASX: RIO) and BHP (ASX: BHP) with the latter having the added boost of a recent quarterly production report that raised expectations of a Pilbara expansion. 

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Motley Fool contributor Mark Woodruff owns shares in Beadell Resources.

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