Factors Affecting the Demand & Supply for the $AUD:
Demand for the $AUD comes from the people wanting to exchange other currencies for the Australian dollar.
People demanding the $AUD include:
· Australian exporters wanting to convert foreign earnings back into Australian dollars.
· Foreigners wanting to service debt in Australia.
· Foreigners wanting to purchase Australian assets.
· Speculators expecting the Australian dollar to appreciate in the future.
Factors Affecting the Supply of the $AUD:
Supply of the $AUD comes from people wishing to sell the $AUD in order to gain other currencies. People supplying the $AUD include:
· Australian importers needing Foreign Exchange to pay for their imports.
· Australians wanting to service overseas debts
· Australians wanting to acquire assets abroad
· Speculators expecting the Australian dollar to depreciate in the future.
Policies to Alter the Exchange Rate:
The floating exchange rate, in theory, should allow the market to adjust the Exchange in response to changes in economic fundamentals. However, sometimes the RBA is required to intervene and does so by:
Indirect Intervention - the government can use monetary policy to influence interest rates and influence capital inflow and outflow.
Direct intervention - this involves buying and selling $AUDs. This method is used far more than indirect as indirect intervention has the adverse effect of impacting on monetary policy.
The Impact of Exchange Rate Movements on the Economy:
The depreciation of the $AUD should have four main effects on the Australian economy:
1. Improved International Competitiveness
A fall in the Australian dollar should make Australia's exports more attractive to foreigners and imports less attractive to Australians. For this reason the Current Account Deficit should be improved.
2. Faster Economic Growth
An improvement in International Competitiveness makes net external demand improve and make a bigger contribution to Australian aggregate demand.
3. Increased Inflation:
Inflation should increase as a result of rising import prices stemming from exchange rate depreciation.
4. High Foreign Debt and Debt Servicing:
There is an adverse effect on the CAD stemming from the 'valuation effect' resulting from the depreciation in the Australian dollar.
The Appreciation of the $AUD Should Have Four Main Effects on the Australian Economy:
1. Worsening International Competitiveness:
Exports will become more expensive for foreigners and imports will become more attractive for Australians.
2. Slower Economic Growth:
A smaller contribution to aggregate demand arising from a changed net external demand position
3. Lower Inflation:
This will be caused by a fall in import prices.
4. Lower Foreign Debt and Debt servicing:
There will be an improvement in the CAD stemming from the 'valuation effect'.