Hey there birdwing,
A sterilised intervention in the foreign exchange market is basically "dirtying the float" it is a direct intervention of the RBA who enters the forex market and buys and sells currency in order to alter the exchange rate. This requires reserve assets in other currencies in order to buy and sell AUD.
E.g. In 2008, when the AUD depreciated against the USD, the RBA purchased $3.3bn of AUD to appreciate the dollar
Although I'm not exactly sure what you mean by "why the sale/purchase of foreign currency needs to be offset by a purchase/sale of CGS?" using monetary policy is an indirect way of influencing the exchange rate. I don't think that they are meant to be used concurrently to offset each other; but I might be wrong here
Hope this helps
Hey Isaac,
Thanks for your reply, but I may not have been clear enough in my original post. Let me try to clarify further
This is what Riley Textbook says.
Direct intervention by the RBA in the foreign exchange market has potential implications for domestic liquidity and the stance of monetary policy. Intervention by the RBA in the foreign exchange market can be ‘sterilised’ to offset its effects on domestic liquidity and interest rates, or ‘unsterilised’, with the intervention allowed to affect domestic liquidity, interest rates and the stance of monetary policy:
Sterilised foreign exchange market intervention occurs when the Reserve Bank offsets its transactions by buying or selling the equivalent amount of government securities, leaving the monetary liabilities of the Reserve Bank unchanged. For example, a sterilised sale of foreign currency involves the RBA selling foreign currency, which takes Australian dollars out of the financial system, but it then buys sufficient government securities to inject the same amount of Australian dollars back into the financial system. There is thus no change in the domestic money supply or domestic interest rates.I'm confused about the second section, where it says 'the RBA sells foreign currency, which takes dollars out of the financial system', as I don't quite understand why that's the case
I did some research and thought I understood it, but then I read over this and it didn't make sense to me.
My question, then, is why does the RBA take dollars out of the financial system when it sells foreign currency?
Sorry for the confusion (and thanks for your help)