Exchange Rates PPT 2 Flashcards
(16 cards)
What are the main factors that affect the supply and demand for the AUD?
Exports/Imports, Foreign Investment, and Income payments into and out of Australia.
What is the TWI and why is it significant?
The Trade Weighted Index (TWI) measures the AUD against a basket of currencies, and is a better indicator of currency movement than a single currency.
Which currencies heavily influence the TWI?
The top four currencies account for 60% of the index.
Chinese Yuan
USD
Japanese Yen
Euro
Sout Korean Won
What affects the demand for a country’s currency?
Demand for the country’s goods and services and international capital flows (foreign investment).
What are the main factors influencing Australia’s exchange rate?
Terms of Trade & Commodity Prices
Relative Interest Rates
Relative Inflation Rates
Domestic Economic Growth
World Economic Growth
International Capital Flows
Why is the AUD known as a “commodity currency”?
Because Australia’s exports, and hence demand for AUD, are dominated by commodities like iron ore, coal, and gas.
What happens when Australia’s Terms of Trade or commodity prices rise?
Demand for the AUD increases, causing currency appreciation.
What is the “interest rate differential”?
The difference between Australian interest rates and those of other countries.
How does high inflation in Australia affect the AUD?
Reduces competitiveness, lowers demand for exports → decreased demand for AUD; encourages imports → increases supply of AUD → depreciation.
What is the impact of a fall in Australia’s interest rate differential?
Decreased capital inflow and increased outflow, reducing AUD demand and increasing its supply → depreciation.
How does strong domestic economic growth affect the AUD?
: Increases imports (↑ AUD supply) and attracts foreign investment (↑ AUD demand); net effect on AUD value is indeterminant.
: How does global economic growth affect the AUD?
Increases demand for commodities → higher prices → increased AUD demand → appreciation.
How do international capital flows influence the AUD?
If Australia becomes more attractive to investors, capital inflows increase → demand for AUD rises → appreciation.
How do income payments affect the AUD?
An increase in outbound dividend/interest payments increases AUD supply → depreciation.
What are the two key textbook factors influencing the AUD?
Commodity Prices – Strong correlation with export values and AUD value.
Interest Rate Differential (AUS vs US) – Positively related to AUD value; falling differential → AUD depreciation.
What causes a depreciation of the AUD?
A decrease in demand and/or an increase in supply of the AUD.
