Exchange rates

Exchange Rate

The price of one country's currency in terms of another currency.

International Trade

Exchange rates determine how much foreign currency is needed to buy domestic goods and vice versa.

1 AUD = 0.69 USD

1 Australian dollar can be exchanged for 0.69 US dollars.

100 AUD at 0.69 USD/AUD

$100 AUD equals $69 USD.

250 EUR at 0.62 AUD/EUR

€250 divided by 0.62 equals approximately $403.23 AUD.

Trade Weighted Index (TWI)

A measure of the AUD against a basket of currencies weighted by trade importance.

TWI Use

Provides a more accurate picture of the AUD's overall value in international trade.

TWI and Exchange Rates

Depreciation against one currency and appreciation against another affects the TWI based on trade importance.

TWI Volatility

More stable than bilateral exchange rates because it’s based on multiple currencies.

Floating Exchange Rate

Market forces of supply and demand determine the exchange rate in a floating system.

Demand for AUD

Foreigners buying Australian goods, investing in Australia, or tourism increases demand for AUD.

Supply of AUD

Australians buying foreign goods, investing overseas, or travelling abroad increases supply of AUD.

Currency Appreciation

When a currency increases in value relative to another.

Currency Depreciation

When a currency decreases in value relative to another.

Factors Affecting AUD Exchange Rate

Terms of trade, commodity prices, interest rate differential, inflation rate, domestic economic growth, world economic growth.

Higher Commodity Prices

Increase demand for AUD → appreciation.

Fall in Interest Rates

Reduces capital inflow, increases outflow → AUD depreciates.

High Inflation in Australia

Reduces competitiveness → demand for AUD falls → depreciation.

Foreign Investment in Australia

Demand for AUD increases → appreciation.

Domestic Economic Growth

Increases imports (supply of AUD ↑) and investment inflow (demand for AUD ↑) — effect is indeterminate.

Impacts of AUD Depreciation

Exporters, tourism industry, and firms competing with imports benefit.

Impacts of AUD Depreciation

Importers, consumers, firms selling imported goods, outbound Australian tourists lose.

Macroeconomic Effects of Depreciation

Higher exports, lower imports, higher GDP, higher inflation → expansionary effect.

Macroeconomic Effects of Appreciation

Lower exports, higher imports, lower GDP, lower inflation → contractionary effect.

J-Curve Effect

After depreciation, the trade balance worsens short-term but improves long-term as export volumes rise and imports fall.

J-Curve Effect Reason

Import prices rise immediately, but export demand takes time to respond.

Trends in AUD Exchange Rate

Export/import volumes, foreign investment flows, income payments.

Key Factors Affecting AUD

Commodity prices and interest rate differential with the US.

Interest Rate Differential with US

Increases in the interest rate differential with the US cause AUD appreciation due to increased foreign capital inflow.