Exchange rates

Trade weighted index

value of AUD relative to a group (basket) of foreign currencies

Increase in D for AUD?

leads to increase in value, appreciation

causes of a decrease in AUD D

• decrease in X

• Decrease in Y credits

• decreased capital inflow

• fall in commodity prices

• fall in the interest rate differential

• higher relative inflation

Increased supply of AUD?

decrease in AUD value, depreciation

causes for an increase supply of AUD

• increase in M

• increase in Y debits

• increase in capital outflow

• fall in the interest rate differential

effects of an AUD depreciation

• X become cheaper for foreign buyers (less revenue)

• M prices increase

• real GDP increase

• production cost increase

• improvement in international competitiveness

• boost economic activity

effects of an AUD appreciation

• higher X cost

• lower M cost

• net X decrease

Demand is made up of:

• credits in the BoP

• D for Aus X

• Foreign investment flowing into Aus ( capital inflow)

Supply is made up of:

• debit in the BoP

• D for overseas M

• foreign investment flowing out of Aus (capital outflow)

Factors impacting the value of Exchange rate

• interest rates differentials

• Terms of Trade

• economic growth of trading partners

• domestic economic growth

• inflation rates

interest rates differentials

if domestic rates increase, increase in AUD D as foreign investment increases towards As, AUD appreciates

ToT

if Tot falls, decrease in D for AUD as our trading partners need less AUD to purchase the same quantity of Aus X

trading partners economic growth

faster growth means more demand for the AUD

domestic economic growth

increased D for M, means increased S of AUD, AUD depreciates

relative inflation rates

higher domestic inflation means less ideal, decreased D for AUD, reduce competitiveness, AUD depreciates