Download Essay Plan Appreciation of the $A

Essay Plan Appreciation of the $A
An exchange rate measures the value of one currency against the value of another. In a clean floating
exchange rate system, a value is reached due to the interaction of the forces of demand and supply to establish
an equilibrium amount, without interaction from a third monetary party. In December 1983, the HawkeKeating government initiated one of the most important structural changes within the Australian economy by
switching the exchange rate system from a managed peg system to a floating exchange system. This opened
the Australian economy up to the surging international investment of the time. An appreciation of the
Australian Dollar occurs when the purchasing power measured against a basket of other currencies increases.
Demand A$, represented all credit transactions, as they need to be traded into $A
1.
S Speculators expect a rise, A$ is 6th most traded, attracted if interest rates are higher then o/s
2.
I Interest Rates, high interest rates attract investors, and financial flows increase
3.
T Trading partners, strong links to trading partners and high dependence
4.
T Terms of trade, improvement will benefit exports
5.
I International competitiveness, and low inflation exports will become attractive and cheap
6.
C Commodity Price, narrow export base, terms of trade increases
Supply A$, represents all debits, need to be traded from A$
1.
D Decreases in all debit transactions, especially imports
2.
S Speculators hold on to currency and do not sell
Effects, trends can be noted from the effects seen. Reverse J Curve Diagram.
NFL, Valuation effect, servicing of debt is reduced due to reduced value. Reduces NFL 725Bill, 633Bill, 92
Bill. The value of foreign assets increases. Positive effect is witnessed. CAD benefits
Inflation/Interest, reduction in inflationary pressures from drop in import prices. RBA can relax its monetary
policy. Imported inflation drops.
Time Lags, Consumer time lag occurs from import contracts, consumer inertia etc. Production time lag
occurs from lack of short term investment. This allows consumers to take advantage without adjusting
volumes.
Terms of Trade, export prices rise, import prices decrease.
Increase of PPP, consumer welfare increases
In the long run, Volume Effect, long term deterioration, time lags expire and volumes are adjusted. Imports
increase. Import growth exceeds export growth
International Competitiveness, depreciation of competitiveness, offsets structural changes leads to loss of
profitability.
Net income reduced as value of overseas assets and investment drops.
Investment, investment is reduced as there is less attraction. There is a reduction of capital inflow and
investment (direct, portfolio).
It can be witnessed that an appreciation o the $A offers short term gain yet long term loss to the Australian
economy. Australia has sustained a rising exchange rate since its initial floating. Yet the 2000’s saw a period
of intense volatility as the Australian dollar reached a 25 year high of 74 in the TWI in 2001 only to fall to a 6
year low in 2008. The experience of the late 2000’s GFC and the effect that it has had on the currency has
shown that whilst the $A is effected by the interaction of supply and demand; an even greater influence is
seen through the actions of the FOREX market and the power that the announcement of the currency value
has on speculators. A whole economy can be undermined by the actions of one market and thus actions need
to be taken to minimise the power of speculator confidence in order for economies to be able to rely on the
stability of their currency.