Exchange Rates

• Exchange Rates


  The value of countries currency in terms of another. It is a measure of relative purchasing power
• Foreign Exchange


  Global worldwide decentralised financial centres around the world that function as anchors of trading between different types of buyers and sellers. The FX determines relative values of different currencies.
• Purpose of FX


  Assist international trade and investment by allowing businesses to convert one currency to another currency.
• Uniqueness of FX

  • Huge trading volume, (high liquidity)
  • Geographic dispersion
  • Continous Operations (Except Weekends)
  • Variety of factors that affect exchange rate
• Trade Weighted Index

  • The weighted average of a basket of currencies that reflects the importance of Australia's trade by country
  • Important currencies are Euro, US dollar, Japanese Yen, Chinese Remindi
  • TWI is considered better indicator of general movement in the value of the Australian dollar than any exchange rate
• Floating Exchange Rate

  • Determined by the forces of demand and supply. Its dollar changes by the minute as the forces of demand and supply change.
  • Appreciation of the AUD is caused by increase of demand or reduction of supply for the AUD
  • Depreciation of the AUD is caused by either an increase in supply or decrease in demand for AUD
• Credit


  In BOP credit represents money flowing into Australia from overseas, this represents demand for AUD
• Debits


  In the BOP debits represents money flowing out of Australia, this represents demand for AUD
• Current Account (Credits and Debits


  Export (Credits) Import (Debits), Primary income, secondary income,
• Capital and Financial Account (Credits/Debits)


  Direct investments, portfolio investments,
• Demand/Supply for Currency

  • Demand determined by exports of g/s, receipts of income from overseas, Capital inflow (FI into Australia)
  • Supply determined by imports of g/s, payment of income to overseas, capital outflow (Aust investment abroad)
• (Depr) Effects of Exchange Rate movements

  • Prices of AUS exprots decrease
  • Prices of imports rise
  • Improvements in international competitiness
  • Net exports will increase increasing trade balence
  • Potentially inflationary
  • CAUSE THE SIZE OF FOREIGN DEBT TO BE REPAID TO BE REVALUED UP
• (Appr) Effects of Exchange Rate movements

  • Prices of AUS exports increase
  • Prices of imports decrease
  • Decline in international competitiveness
  • Net exports will decrease worsening trade balance
  • Domestic manufacturers to suffer as imports are cheaper
  • CAUSE THE SIZE OF FOREIGN DEBT TO BE REPAID TO BE REVALUED DOWN