Analysis on the exchange rate of Australian dollar
46
but remained fluctuated increase later, and peaked the highest level now. In addition, it can be seen that the trend of nominal exchange rate compare to the trend of RER are the
approximately similar during long period according to the Figure 1 and Figure 2. Mark Crosby also gives the support to this comparability; he illustrates the high correlation between the real and the nominal exchange rate
for AUD according to the pricing-to-market models in a long period Crosby, 2005. So it can be said that the trend of real and the nominal exchange rate are mostly the same in this ten years. But the difference between the
nominal exchange rate and the RER is that, when the domestic currency’s nominal exchange rate increases, the currency appreciate; when the RER increases, according to the formula e x PP, P is higher than the foreign
price level P, this indicates that the value of domestic currency to purchase the same foreign goods and services have relatively increased, that means need more domestic money to buy the same things, so the currency
depreciate. Because of the high correlation, I chooses both the two rates to support this argument according to the
sources which download from government’s statistics.
Units of AUD per USD
0.0000 0.2000
0.4000 0.6000
0.8000 1.0000
1.2000
00 3
31 00
9 30
01 3
31 01
9 30
02 3
31 02
9 30
03 3
31 03
9 30
04 3
31 04
9 30
05 3
31 05
9 30
06 3
31 06
9 30
07 3
31 07
9 30
08 3
31 08
9 30
09 3
31 09
9 30
10 3
31
Figure 2 Nominal exchange rate of AUDUSD
4. Factors affecting the changes
Under the floating exchange rate system, money is volatile and determinants by the law of supply and demand also. There are many factors inducing the changes of supply and demand of money, so the market
equilibrium of money can be influenced. These influences are so complex, any factors which change the money supply and demand, can be going some way affect the exchange rate, but some are strong, some are weak. In my
analysis, the author chooses the following three main factors that can be caused the changes of AUD exchange rate in Australia specific.
4.1 Relative raw materials prices changes
Australia is a major exporter of mining and agricultural commodities. The price of these raw materials prices are positive correlation with AUD exchange rate. The raw materials are the necessary commodities in generally,
so they are inelastic demand. Theoretically, when the price of the inelastic demand commodities has increased, the total revenue has increased also. And the demand for AUD has increased following the raw materials’ climbing
price, suppose the Australian government not issued the new quantity of AUD, the demand curve of AUD has shift
1.2000 1.0000
0.8000 0.6000
0.4000 0.2000
0.0000
Analysis on the exchange rate of Australian dollar
47
to right, but the supply curve remain the same, the AUD has appreciate at last. This theoretic is representing in practice also, especially to the price of gold and copper. Other expert indicates that AUDUSD has a strong
positive correlation with gold price due to the fact that Australia is the world’s third largest exporter of the commodity Blystone, 2006.
Figure 3 illustrates the trend of AUDUSD comparing the trend of gold price from March 2000 to March 2010. The total trend of these two indexes is both increased during long time. When the gold price decreased to
the bottom to 255.95 in March 2001 and 395.80 in June 2004, the AUD depreciated to 0.4890 and 0.6889 respectively; the October 2008 also saw the low gold price of 730.75, and the exchange rate of AUD decreased
into 0.6680. These were the lowest price in that three periods. Contrarily, when gold price began to increase to 415.64 after September 2004, the AUD began to appreciated to 0.7147; and since October 2009, the gold price
continued increase in a new high level from 1040 to 1179.20, the exchange rate also saw the highest of 0.9161 to 0.9266. The evidence from graph 2 indicated the closely relationship between gold price and AUD.
0.0000 0.2000
0.4000 0.6000
0.8000 1.0000
1.2000
Mar -200
Jul -200
Nov -200
Mar -200
1 Jul
-200 1
Nov -200
1 Mar
-200 2
Jul -200
2 Nov
-200 2
Mar -200
3 Jul
-200 3
Nov -200
3 Mar
-200 4
Jul -200
4 Nov
-200 4
Mar -200
5 Jul
-200 5
Nov -200
5 Mar
-200 6
Jul -200
6 Nov
-200 6
Mar -200
7 Jul
-200 7
Nov -200
7 Mar
-200 8
Jul -200
8 Nov
-200 8
Mar -200
9 Jul
-200 9
Nov -200
9 Mar
-200 9
0.00 200.00
400.00 600.00
800.00 1000.00
1200.00 1400.00
A U D U S D G o l d
Figure 3 The trend of AUDUSD and the price of gold
4.2 Relative domestic price level and import-expert changes
The demand for Australian exports varies for a variety of reasons. One reason is changes in domestic prices; another is the terms of trade. These two variations tend to have an immediate impact on the AUD. When domestic
price increase, or rise rapidly in Australian but remain constant or rise slowly in other countries, Australian consumers need more foreign consumptions because they are cheaper, these cause the imports in Australia have
increase, and Australia need more foreign currencies; in the same time, foreign nations need less high-priced Australian goods, these cause the exports in Australia decrease, foreigner need less AUD. Based on the demand
and supply principle, the value of AUD decrease, so AUD depreciate. Conversely, when domestic prices decreased than other nations, the imports decrease and exports increase, Australia need less foreign currencies but foreigner
need more AUD, these cause AUD appreciate. Simpson Evans 2004 in their article used the Cranger causality method combined with error correction
modeling and VAR analysis, and their results indicate that the evidence is stronger that “commodity price changes lead AUD exchange rate changes; and there is a significant negative short-term relationship between local
