Analysis on the exchange rate of Australian dollar
45
defined as “the nominal exchange rate that takes the inflation differentials among the countries into account”; the two calculate method are the purchasing power parity PPP and whether tradable and the non-tradable goods. The
RER is calculated as e x PP in general, e is the nominal bilateral rate, P is the price level of the home country, and P is the price level in the foreign country, but the question is that how to ensure the P and P? According to
the Reserve Bank of Australia, depend on the different purposes, the choice of the price level can movement on the Trade, Import and Export Weights, Third-country Export Weights, GDP Weights, or Capital Account Weights
Ellis, 2001. The data in my analysis are based on the Reserve Bank of Australia and Australian bureau of statistics, and
they choose the Trade Weighted Index, Import Weighted Index, Export Weighted Index, and GDP Weighted Index to represent the RER of AUD.
3. The trend of AUD in ten years
In particular, Figure 1 and Figure 2 apply a filter rule to the nominal exchange rate in AUD against a major currency in the world—USD Figure 1, compares it to the RER in ten years Figure 2 from March 2000 to
March 2010, and illustrates the ten years trend of AUD. The exchange rate data were all obtained from the Reserve Bank of Australia.
0.0 20.0
40.0 60.0
80.0 100.0
120.0 140.0
160.0 180.0
Ma r-
00 Ma
r- 01
Ma r-
02 Ma
r- 03
Ma r-
04 Ma
r- 05
Ma r-
06 Ma
r- 07
Ma r-
08 Ma
r- 09
Ma r-
10 r e a l t r a d e - w e i g h t e d
i n d e x r e a l i m p o r t -
w e i g h t e d i n d e x r e a l e x p o r t -
w e i g h t e d i n d e x r e a l G D P - w e i g h t e d
i n d e x
Figure 1 Real exchange rate of AUD
The trend of AUD in ten years indicates that Australian dollar has continued appreciate in the long time. But there have depreciation in the middle time. There is at least some evidence in the Australian data and the graphs to
suggest that the exchange rate trend towards a long-run equilibrium level, but have fluctuation in the short-time. It can be seen that the exchange rate continued decrease from 2000 to 2001, in March 2001 decreased to the bottom;
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
