Does Tony Abbott know what he is doing?

Reserve Bank Reserve Fund foreign currency Australian dollar | Crikey

Bernard Keane in Crikey notes that Tony Abbott seems to think that his government giving the Reserve Bank $8 billion (and causing an immediate increased "blowout" - don't media organisations love that word  - to the budget deficit) is about the Reserve Bank being able to intervene to drive down the Australian dollar.

Bernard says this is  not the case:

But the odd thing about Abbott’s remarks linking the $9 billion to pressure on the dollar is that there is no link. In contrast to the urgency portrayed by Hockey, the RBA hasn’t received the funding yet — as Treasury’s briefing on the issue to then-treasurer Wayne Swan earlier this year noted, there is no mechanism for the government to simply hand $9 billion to the RBA, so it will require a parliamentary appropriation. The RBA will in turn use the funding to buy foreign currencies, mainly the US dollar, because it aims to hold just over half of its assets in foreign currencies.

The $9 billion in fact has no bearing on whether the bank can intervene against the strength of the dollar — for one thing, it’s nowhere near enough to make a big difference. And pushing the dollar down will actually increase the value of the bank’s foreign currency holdings, rather than deplete its assets as Abbott appeared to suggest. It seems that Abbott doesn’t have a basic grasp of why exactly he’s blowing a $9 billion hole in his own deficit (no matter how much he might insist it’s Labor’s deficit).

Worse, he has created the impression that the $9 billion handout has a quid pro quo that the independent RBA will now intervene against the dollar. Our trade-exposed sector, particularly manufacturers but also miners (whose contracts are usually set in US dollars) will all benefit from a fall in the dollar, with flow-on benefits for federal government tax revenue. This will help the Abbott government avoid the nightmarish fate of the Gillard government, which had to sit back and watch as the Aussie dollar hammered the trade-exposed sectors of the economy and slashed corporate tax revenue while the RBA hummed and hawed about why the dollar wasn’t reacting like normal to a fall in our terms of trade.

Abbott’s remarks apparently caused confusion and concern at senior levels within the bank — yet another legacy of Hockey’s $9 billion handout, and the Prime Minister’s hazy grasp of economics.