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Explain the domestic and global factors that influence Australia’s exchange
rate and the impact of exchange rates on the Australia’s economy
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Exchange rates can either be measured relative to other individual currencies or by the Trade
Weighted Index (TWI)
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Changes in these domestic and global
factors may cause the A$ to appreciate or depreciate
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There a two ways of measuring exchange rates
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For example 1 A$ is worth 0
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64 Euro
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This gives an indication of how the value of A$ is moving against the currencies of
Australia’s major trading partners
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The currencies of the
countries that are more significant in Australia’s trade are given a higher weighting so that they have
a greater influence on the TWI
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Under a floating system the exchange rate is determined
by the interaction of the supply and demand of the A$
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Australia’s floating exchange rate system has opened up the
Australian economy to global financial flows
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The demand for the A$ is influenced by domestic factors
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For example, an increase in commodity prices
and the TOT would increase the demand for A$ because there would be an increase in demand for
Australian exports which means more people need to buy the A$ to purchase these exports
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For example, an improvement in international competitiveness of Australian
industry/ drop in domestic inflation rates would increase the demand for the A$ because it leads to
cheaper prices and thus more demand for Australian exports which means more people need to buy
A$ to purchase these exports
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The level of foreign investment into
Australia influences the demand for the A$
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Australia’s interest rates relative to overseas rates influences the demand for the A$
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Expectations of the future movement of the A$ influences
the demand for the A$
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The
demand for Australian exports influences the demand for the A$
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Changes in global economic conditions influences the demand for the
A$
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The supply of the A$ is influenced by domestic factors
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For example, an increase in investment by Australians
overseas would increase the supply of the A$ because more people are selling the A$ in order to buy
the currency of the foreign country they are investing in
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For example, the improved performance of the Australian
economy would increase the supply of the A$ because more people now have money and are willing
to buy imports and thus need to sell their A$
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For example, an improvement
in the competitiveness of domestic firms with imports/ improvement in the domestic inflation rate
would decrease the supply of the A$
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The supply of the A$ is also influenced by global factors
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For example, an increase in Australia’s interest rates
relative to overseas interest rates would decrease the supply of the A$ because people will stop
putting their money in banks overseas and thus stop selling the A$, putting it in banks in Australia
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For example,
expectations of the A$ to appreciate would decrease the supply of the A$ because people will hold
onto their A$ instead of selling them and then sell them at the higher price
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For example, an increase in demand for imports would increase the
supply of the A$ because more people need to sell A$ in order to buy the foreign currency to
purchase the imports
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05 to around US$0
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The fall is due to a
number of global and domestic factors
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But the A$ remained high, held up by the global factor of increased foreign
investment with international investors seeking a safe haven currency due to fears about the US$
and Euro
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However, with Mr Bernanke’s announcement regarding the winding back
of quantitative easing and the improved outlook for the US economy, the A$ did fall
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The first, a decrease in Australia’s interest rates relative to the overseas rates
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Thus, investor funds will flow from
Australia to the US causing the supply curve to shift to the right because more investors are selling
the A$ and the demand curve to shift to the left because less investors are buying the A$
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This is because of the prediction the US
stock market will fall subsequently causing the Australian stock market and economy to suffer as
well as the prediction the US economy will perform well in the future
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The economic effects of a depreciation can be negative
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This is because imports cost more as the A$ now buys less of the
foreign currency
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This is because it costs more to pay back interest as the A$ now buys less of the foreign currency
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This is because it
now takes more A$ to buy the same amount foreign currency increasing the value of the debt
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Lastly, a depreciation of the A$ causes an increase in the CAD
due to enlarged primary income debits
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The economic effects of an appreciation can also be positive
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This is because foreigners can now buy
more A$ with the same amount of their currency and thus exports are cheaper on the world market
which means more are bought
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This is because it now costs Australians more to buy the same amount
of imports thus less imports are bought
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A depreciation of the A$ causes an
increase in foreign investment because it is cheaper for foreigners to invest in Australia as the same
amount of their currency buys the more A$
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This is because when they change the foreign currency back to A$ they get more as the
same amount of foreign currency buys more A$
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Thus more money is coming into
Australia then going out
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05 to around $US0
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On one hand, according to the RBA, the
depreciation is expected to increase domestic inflation
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This allows
domestic firms to lift their prices
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On the other hand, according to the RBA, the depreciation is expected to provide increased
economic growth throughout 2014
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However, this has predominantly occurred among resource exports
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Overall, with a further expected boost in exports and restraint of imports,
economic growth is likely to increase a little in 2014, mainly because of the recent depreciation of
the A$, but still to a pace that is a little below trend
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An appreciation or depreciation of the A$ can impact on
the Australian economy both positively and negatively
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