TomHaynes - Exchange Rates - Chapter 5 lyrics

What is an exchange rate? When does a currency depreciate/appreciate and when does it devalue/revalue? Factors leading to an appreciation of Australia's currency The level of GDP in overseas economies and the state of the global economy The level of inflation Interest rate differentials The expected value of a currency Main factors causing an appreciation or depreciation of the Australian dollar Appreciation Depreciation An increase in Australian interest rates or decrease in overseas interest rates An decrease in Australian interest rates or increase in overseas interest rates Improved investment opportunities in Australia or deterioration in foreign investment opportunities Deterioration in investment opportunities in Australia or improvement in foreign investment opportunities A rise in commodity prices and an improvement in Australia's terms of trade A fall in commodity prices and an deterioration in Australia's terms of trade An improvement in Australia's international competitiveness A deterioration in Australia's international competitiveness Lower inflation in Australia Higher inflation in Australia Increased demand for Australia's exported goods and services Increased demand for Australia's imported goods and services Expectations of a currency appreciation Expectations of a currency depreciation ' Effects on the BOP from appreciation of the AUD Negative effects Positive effects By increasing the value of the AUD in terms of other currencies, Australia's exports become more expensive on world markets and therefore more difficult to sell, leading to a decrease in export income and deterioration in Australia's CAD in the medium term Australian consumers enjoy increased 'purchasing power' -- they can buy more overseas produced goods with the same quantity of AUD Imports will be less expensive, encouraging import spending and worsening Australia's CAD. Domestic production of import substitutes is likely to fall An appreciation decreases the interest servicing cost on foreign debt because Australians can buy more foreign currency with AUD. This would reduce outflow on the net primary income component of the current account in future years and help reduce the CAD Higher import spending and reduced export revenue will reduce Australia's economic growth rate An appreciation will also reduce the AUD value of foreign debt that has been borrowed in foreign currency -- through the valuation effect Foreign investors will find it more expensive to invest in Australia, generally leading to lower financial inflows. However, financial inflows may continue if foreign investors expect the currency to continue rising Inflationary pressures in Australia will be reduced as imports become cheaper. This is likely to reduce pressure on the RBA to raise interest rates to defend its inflation target An appreciation reduces the AUD value of foreign income earned on Australia's investments abroad and would cause a deterioration in the net primary income component of the CAD An appreciation will also reduce the value of foreign a**ets in Australian dollar terms -- a phenomenon known as the valuation effect