10.4 Australia’s exchange rate

• The exchange rate provides a direct link between Australia and the rest of the world.

• A change in the exchange rate influences the The Balance of Payments

  • by affecting international competitiveness
    • → influences export revenue
      • → influences BOGS (CA)
  • and the size and servicing costs of our foreign debt
    • → influences CAD

• the two tested directions of implications:

  • Exchange rate → impact on Economy (or BOP)
    • Appreciation:
      • → less international competitiveness (Dutch Disease)
        • → decline of manufacturing (during mining boom)
    • Depreciation:
      • → more international competitiveness
        • → inflation
          • ← more imports of capital goods
  • Balance of Payments (BOP) → impact on Exchange rate
    • ..

Recent fluctuations in the ER

• Volatility in $A is largely due to volatility in commodity exports’ prices and global conditions.
• During 2003-2011:
  • $A surged in value due to resources boom
    • as a result of China’s growth
• During 2011-2016:
  • $A fell due to collapse of commodity prices on the global market.
• During 2016-2019:
  • $Ahitsa10-yearlow,remainingbelowUSD$0.80, mainly due to:
    • low interest rates in Australia, discouraging foreign investment into Australia
    • low foreign confidence in $A
    • forex speculation adding to volatility
    • downward trending iron ore exports (to china)