How does expectations of increases in US interest rates affect Australian exchange rates and balance of payments?
Hey Chloe,
Sorry for the late reply but if you or anyone is still interested; if people in Australia expect that US interest rates will increase, relative to domestic interest rates, then Australians will be more likely to put their savings into US banks in order to gain a higher return on investment (higher interest than if they put savings into domestic banks). In the short term, this will increase the supply of Australian dollars in the fx market as people convert AUD into USD; thus causing a depreciation of the exchange rate. In the long term, US banks pay interest and principal back to Australians who will convert USD into AUD and thus cause an increase in demand and an appreciation.
For Americans, they are less likely to take out loans from their banks and instead may take out loans from Australian banks because the interest rate is relatively less than their own. To do this, they will take out the loan and convert AUD to USD for them to use, thus increasing the supply of AUD and causing a depreciation. Conversely, when the loan is paid back with interest, Americans will have to convert USD into AUD. In doing so, will increase the demand for AUD and cause an appreciation.
These transactions will inevitably affect the balance of payments because the two accounts balance to form equilibrium in a floating exchange rate situation. (money flowing into Australia + money flowing out). Depending on what the the transaction was, it will affect different accounts (loans taken out of australian banks by americans will decrease the capital and financial account - specifically portfolio investment in the financial account. In the future when it is repaid, servicing costs of interest will be paid on the current account.)
Hope this helps
Hi,
Was just wandering, is there a diagram for a revaluation of the $A?
Hey there,
I'm not too sure what you mean by "revaluation" if you could elaborate a bit more, that would help me give a better answer.
But my understanding of your question is that instead of having a floating exchange rate the government would interfere in the fx market and would evaluate the AUD value itself, in which case it would manipulate the demand for/supply of the AUD by buying and selling foreign currency. The graph for this is the same as an appreciation - it can be used to demonstrate multiple valuations of the AUD by ensuring that each curve is labelled correctly.
Hope this helps, let me know what you meant by revaluation though please
Does anyone know an easier-ish way to remember whether factors cause the AUD to appreciate/depreciate?
Thanks!
Hey Caitlin,
So firstly I would understand what causes an appreciation (increase in demand for AUD and a decrease in supply) as well as a depreciation (decrease in demand and increase in supply). Then it's not so much as memorising, but understanding, so ask yourself - what would cause an increase in demanda for the AUD, which translates to "why would overseas people swap their currency for AUD?" the first thing that comes to my head is they want our goods and services - then I think why would they want ours? maybe it's because we are internationally competitive in that market, maybe world growth is outstripping domestic growth making our imports cheaper?" this train of thought for a few other reasons is what solidifies the theory in my head, it might work for you, if not - I would try to make a list of reasons that is succinct and easy to memorise that prompts thought on the reasons why.
Hope this helps, please let me know if you need more clarification
Hi,
What is the difference between the net secondary income in the current account and the capital transfers in the capital account?
Hey there, sorry for the incredibly long wait for an answer!!
In the balance of payments, it's split into 2 sides, the current account which records all the non-reversible transactions (won't need to be paid back) and the capital and financial account recording reversible transactions. The net secondary income account is in the current account and records "net current transfers" i.e. non-market transactions. This essentially means things like
unconditional aid and pensions --> things that arent a result of a previous exchange or transaction. Whereas the capital account in the capital and financial account records "capital transfers." this can be understood in a few ways; firstly capital as in funds to contribute to a project/business --> in this way it means conditional/tied aid grants. The other definition is that of non-produced, non-financial assets; including copyrights, trademarks, franchises (basically intellectual property rights.)
Hope this helps
HI,
Just had a question ? what factors determine the appreciation and depreciation of the exchange rate?
thanks
Hi Soha,
Just in terms of clarity I will just dot point them - if you need clarification as to how or what they are, please don't hesitate to ask
Appreciation - caused by an increase in demand for the AUD or decrease in supply in the fx market:
Depreciation - caused by a decrease in demand for the AUD or increase in supply in the fx market:
AUD interest rates relative to overseas interest rates
AUD investment opportunities
Market expectations
Demand for AUD exports (further affected by TOT, international competitiveness, global economic growth, tastes and preferences)
Corporate transactions
Im hoping that you might be able to extrapolate and infer the combinations of the above reasons which would cause an appreciation or depreciation - i.e. a high demand for exports because of internationally competitive exports would increase the demand for exports, increase demand for AUD and cause an appreciation.
Hope this helps