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Exchange Rate: This is the rate at which one unit (of domestic currency) can be exchanged to a specified amount of foreign currencies
The following are some examples of people who might have a need for the Australian currency:
A variety of factors will impact the Australian dollar’s market demand. These are:
Price Expectations
Exports to Australia are in high demand
These people could create an Australian dollar supply:
There are many factors that can affect the supply and demand for Australian dollars. These are:
The extent of Australian financial flows
Price Expectations
Import demand in the country
Intervention of the Reserve Bank on the Forex Market
The Exchange Rate and Government Policy
Intervention by external forces
In its domestic operations, purchasing Commonwealth Government Securities
Intervention that does not involve direct action
There are negative side effects as well as the positive ones mentioned above. These include:
APPRECIATIONAs depreciation has negative effects, appreciation can also have positive ones. Some positive effects include:
The following are the negative effects that a currency appreciation can have on your life:
What factors are affecting the supply or demand for Australian dollar in foreign exchange markets. It is important to understand the potential causes and consequences of currency appreciation or depreciation for the Australian economy. What factors have impacted the Australian dollar’s value in the last four months?
Exchange Rate: A rate at which one unit domestic currency can be exchanged for a certain amount of foreign currency. A BRIEF HISTORY of the Australian Dollar (AUD) Before 1971, the Australian dollar was tied to the British pound. The AUD fluctuated with the pound, so it was a pegged currency. The 1971 US dollar became the AUD’s pegged currency. These currencies were fixed currencies. The Australian currency would not change value if any major global currency changed. This system was broken in 1974, when AUD was tied to a trade weighted list of currencies. It was a fixed money. This currency list was moved in 1976. When needed, small shifts could be made. The AUD was made a floating currency in 1983. The supply and demand determine the dollar’s value. The Reserve Bank of Australia did not initially intend to intervene on the market. However, intervention has been required to keep the price stable and to maintain it. FACTORS AFFECTING SUPPLY/DEMAND OF AUSTRALIAN Dollars. A floating exchange rate, like Australia’s, means supply and demande factors determine the dollars equilibrium value. The equilibrium exchange rates can change due to fluctuations in both supply and demand. The Reserve Bank of Australia can also influence the supply/demand of Australian dollars.
DEMANDAustralian currency demand in foreign exchange markets (Forex) are derived demands. It comes from the country’s exports of services and assets.
Simple words can describe who may be interested in the Australian dollars.
Australia is a popular destination for international tourists
International investors who wish to buy Australian property or shares
Australia is home to many international companies that are expanding or setting up new branches.
Investors and speculators who believe the Australian dollar’s value will rise in the hope of making profits.
There are a variety of factors that can affect the Australian dollar’s market demand. These factors include: The size of Australian financial flows
The dollar’s demand will be affected if there are large financial flows from Australian investors wanting to invest. The Australian interest rate and confidence in Australia will influence the amount of capital that flows into the country. Australia’s higher interest rates will lead to greater capital inflow and a stronger sense of confidence. This theory suggests that the Australian dollar is currently in a strong position. The interest rates are rising (the official rate has risen 0.25 points, to 4.5% recently and will rise to 5.25% by September. With economic growth at around 3.75% for 2002/03, it is likely that the interest rates will continue to rise). The budget released recently has increased the confidence in future growth. The 2002/03 budget was a deficit budget. It was published on 14 May 2002. This means that more money has been spent than has been earned by the government. This money injection will stimulate economic activity as well as growth.
Price Expectations Speculators are expecting a future appreciation to the AUD. They expect to profit from selling the dollar later at a higher rate and buying it now.
The Demand For Australian Exports. The demand is variable for many reasons. Changes in commodity price are one reason. Another reason is changes in commodity prices. These variations have a direct impact on the Australian Dollar. The Current Account Deficiency (CAD) will likely be reduced by an increase in commodity price and improvements in terms of trade. This is because the expectation is that the CAD would improve over the short- to medium-term will cause an increase in AUD value.
The Australian inflation rate and international competition also have an impact on the demand for Australian products. Australia’s exports should be competitive on the world markets and Australia’s inflation rate low. This will make them less attractive to foreign buyers.
Global income levels may change, which will impact the demand overseas for Australian exports. The income levels of Australias trading partners is a key factor in the demand of Australia’s commodities exports. Australian exports will see a rise in demand during periods of economic recovery.
World demand for Australian exports is also affected by the preferences and tastes of overseas consumers.
The currency’s value will generally appreciate when there is more demand for Australian dollars. The page shows a supply-demand curve, which indicates an appreciation for the dollar.
SUPPLY The supply for Australia’s currency can also be derived. It is also derived from the Australian residents’ demand for foreign goods and services.
Australians who are willing to import from overseas could create an Australian dollar supply.
Australian tourists travel abroad
Banks and other Australian firms lend or invest money overseas.
Australians pay for different services abroad, including repaying loans and paying interest.
Investors and speculators
There are many factors that will affect the supply of Australian dollars. These factors are: The size, and the timing of financial outflows from Australia. Also, the domestic interest rate relative to overseas will have an impact on financial outflows. If Australian interest levels are low and Australian confidence is declining, capital outflows will increase. Currently, interest rates are low, but they will rise as economic growth and confidence are high. There will be no significant increase in Australian dollars.
Price Expectations. Foreign exchange investors and speculators will sell AUD if they expect that the AUD’s value will decrease. This will increase AUD supply and contribute towards the expected depreciation.
Australian importers must sell AUD to be able to purchase foreign currencies to cover the domestic demand. The amount of income within the country will determine how much imports are needed. As the domestic economy is expanding, both output employment as well as income are increasing, so will the demand for imported goods. This will lead to an increase in AUD supply. People may decide to purchase prestige goods overseas if they have higher income.
Imports demand will also be affected based on domestic inflation and domestic competition. Imports will become more affordable if Australia’s inflation rate is higher than its competitors and its firms are less competitive. This will lead to a rise in demand for imported products.
The tastes and preferences of Australian consumers are constantly changing. As such, a rise in demand for services and goods made abroad will increase supply of USD on the foreign currency market.
The dollar’s supply increases and the currency’s price falls.
THE GOVERNMENT’S PART IN THE EXCHANGE RATE The RBA has the ability to intervene in foreign exchange markets and can implement government policies that influence the dollar’s value.
Reserve Bank Intervention in Forex Market. In general, the Australian exchange rate can float free and the market will decide its value. RBA intervention in the Forex Market The RBA occasionally intervenes in order to affect the exchange rate and thus make it dirty. There are many reasons intervention may occur. These are:
1. An exchange rate that is too different from its steady long-term equilibrium can have negative economic consequences for conditions such as inflation and employment.
2. Excessive speculation can lead to a heightened sense of anxiety in the foreign exchange markets.
3. RBA officials may also intervene to avoid excessive depreciation (which can lead to higher input price and inflation) and excessive appreciation (leading, in turn, to higher export costs and a loss international competitiveness).
The Exchange Rate: Government Policies
As a seller or buyer of foreign currency, the RBA may intervene in the force market. This is done to stabilize the market and reduce excessive volatility due to misinformed speculation.
Indirect intervention by the RBA through market operations may allow it to change interest rates. This could have an indirect effect on the difference in interest rates between Australia and other countries. An increase in overseas interest rates will encourage capital flows and raise demand for the Australian Dollar. This could be done to avoid further depreciation. Falling Australian interest rates will stimulate capital outflow and increase supply relative to demand. This would stop the Australian dollar from increasing in value.
The government might use a combination of macro-economic policy to increase or decrease Australia’s economic growth relative to other countries. Contractionary policies in monetary, fiscal, and industrial relationships may lower aggregate demand, as well the demand to imports. In this case, the exchange rate could rise. Or, expansionary macro-economic policies could be used to increase aggregate demand.
Direct intervention. The RBA’s intervention in foreign currency has the potential to impact domestic liquidity. RBA intervention can be unsterilized to mitigate the effect on domestic liquidity, interest rates and domestic liquidity.
Sterilisation is the process by which the RBA buys or sells the equivalent amount in government securities to offset foreign exchange market intervention. The RBA has no monetary liabilities.
Foreign exchange market intervention that isn’t sterilized does not involve the sale or purchase of offsetting government securities. Unsterilised foreign currency sales or purchases will result in a fall or rise of the money supply as well as a rise/fall in interest rate.
Sterilized intervention has been a core part of the RBA’s policy. Two ways to do this are:
In its domestic operations, Commonwealth Government Securities can be purchased. A foreign currency swap is where one currency is exchanged for another in a spot market. At a future date, the transaction will be reversed at an agreed price (futures market).
Indirect Intervention Monetary policy initiatives, which are more indirect in their ability to influence the exchangerate, are rarely used. The government may raise interest rates to reduce rapid depreciation. Higher interest rates will encourage more foreign savings. These savings must be converted to AUD. This policy will boost demand for AUD but will not be long-lasting. The RBA is unlikely to adjust interest rates to currency movements, as its primary goal is to impact the domestic economy. Sometimes, fluctuations in exchange rates are so severe that they can affect stability and inflation. In April 2000, this was an example. The RBA stated in April 2000 that low inflation was one reason it decided to raise interest rates. This was the RBA’s first open adjustment to interest rates since 1986, when it had done so in response a changes in the exchangerate.
EXCHANGE RATE MOVEMENTSDEPreciation and appreciation both have positive and negative effects. It raises the price of imported goods in Australia and lowers export prices. When appreciation occurs, it lowers domestic prices for foreign goods as well as raises foreign prices.
DEPRECIATION There are many benefits to the depreciation Australia’s currency. These are:
A decrease in the exchange rates will benefit the long-term competitiveness for the tradable sector (producers which compete with imports or exports). In this way, Australian goods and/or services will be more cost-effective and therefore more comparable to similar goods and/or services manufactured overseas. This will increase export income and decrease import expenditure. This will increase the Current account deficit (CAD). This theory has been called the theory the J Curve.
A decrease in the value of Australian assets may result in higher capital flows to Australia. This could reduce foreign debt levels and encourage foreign equity investment.
A devaluation can cause a structural shift in the Australian economy’s structure, e.g. An increase in services and manufacturing exports.
There are some negative side effects to the positive ones. These include: A currency appreciation can cause higher import costs and lower export prices. This can result both in lower export volumes income and increased import costs. The CAD size will rise if the export income drops and the import spending goes up in the short-term.
Inflation rates can rise when there is a depreciation. If inflation expectations are not contained, then this can occur. Micro-economic policy has been in place since the 1990s. It is designed to help smoothen inflation and increase flexibility when the economy deals with large currencies shocks, like the 1997 Asian financial crisis. These policies include national competition and enterprise bargaining.
A decrease in the dollar’s value will immediately have an impact on the currency’s value. e.g. The value of the USA section will increase if the AUD is depreciated against it.
A decrease in the AUD’s value will increase the debt-servicing percentage. The ratio of interest repayments to exports is called the debt-servicing rate. Higher interest payments can result in a larger net income gap and an increase of the CAD.
RBA could make an indirect intervention to support exchange rates by raising interest rate if there is a significant depreciation. This can reduce investment and economic growth, as well as domestic confidence.
APPRECIATIONLike depreciation and appreciation, there are both positive and negative consequences. Some of the beneficial effects include: In the short-term, appreciation of a currency rate reduces import costs while increasing export prices. This can increase export income, but also lower export spending. This will result in a decrease in the CAD.
The lower import prices may cause lower domestic inflation rates. This will raise consumers’ real income which could in turn increase their standard of living.
A currency appreciation will lower the value of any foreign debt it has paid. If the AUD’s value is higher relative to, Australia’s US foreign debt will decrease.
A decrease in debt-servicing ratio will result from appreciation. A lower interest rate can result in a larger net income deficit, and a smaller CAD.
A currency appreciation will have negative consequences. It will make it more difficult for Australian producers to compete in the tradable good sector. The Australian goods and services will be less competitive in price and thus less appealing to foreign buyers. This would cause an increase in the CAD.
A higher level of appreciation could result in greater capital outflows from Australia. This is due to the fact that Australian assets are more expensive than goods and services made overseas. This would result in a decrease in foreign equity investments in Australia.
It could increase unemployment as export-oriented industries restructure to maintain international competitiveness.
Indirect intervention might be made by the RBA to support exchange rates by lowering interest rate to decrease the demand for Australian dollar. This could cause high levels domestic inflation and economic growth.
RELEVANT TRENDS IN AUSTRALIAN DOLLARI In recent months, the Australian Dollar has been on an upward trend. This trend appears to be continuing. The AUD traded at.51715 on February 18, 2002. It currently trades at.54795. The strength of US dollar makes the exchange rate currently considered to be undervalued. Ross Gittins of the Sydney Morning Heralds Economic Edit says that both the Australian and American dollars are overvalued. He claims that this is an inequality and that it is unsustainable. However, they must be corrected eventually. The Australian dollar may be experiencing a surge in value and momentum against other major currencies, including the.
The recent economic figures that Australia posted, which showed a strong economy in Australia, as well as the projected rise in interest rate are just a few of the reasons the Australian dollar is appreciated.
