The Price Mechanism
The demand for the $AUD comes from the people wanting to exchange other currencies for/into the Australian dollar
Factors that affect the demand for the Australian dollar $AUD include things such as the demand for Australian exports. The more demand for Australian exports there is also a higher demand for the Australian dollar, as domestic producers wish to be paid with their own currency. The factors that influence the demand for our exports include relative inflation rates, and consumer tastes and preferences.
Capital Flow is also another factor that affects the demand for the Australian dollar. Investment into Australia will have to be carried out with $AUD. Meaning that as more foreign investors invest within Australian producers, there will be an increase in the demand for $AUD.
People that demand the $AUD include:
Australian exporters wanting to convert foreign earnings back into Australian dollars
Foreigners wanting to purchase Australian assets
Speculators expecting the Australian dollar to appreciate in the future
Factors that affect the supply of the Australian dollar include issues such as the demand for imports by Australia, with increased demand for imports by Australians it will therefore increase the supply of $AUD; causing a currency depreciation. It also works in reverse for a decrease in demand.
Capital out flow is another factor that can affect the supply of the Australian dollar, an increase in capital outflow will therefore increase the supply of $AUD on the ‘forex’ market.
With this factors that influence demand for imports are the level of domestic income, level of competitiveness of import replacement industries, and tastes and preferences.
Yet another factor that affects the supply of the Australian dollar is changes within exchanges rates, the $AUD can appreciate or depreciate as a result of changes in supply and demand if it happens to be a floating exchange rate. A depreciation will make exports cheaper and imports dearer meaning a fall in the purchasing power of the $AUD, and therefore may cause an increase in supply or a decrease in demand. A appreciation, forcing exports to become dearer and imports cheaper means there would be a rise in the purchasing power of the exchange rate, which may be caused due to an increase in the demand for $AUD or a decrease in supply.
The graph to the right shows the movement of what the Australian dollar has equalled over the past five years. In particular over the past two years since 2013, the movement of the Australian dollar in relation to the Japanese Yen has been fairly stable after having an extreme depreciation towards the end of 2013 from low 100’s to high 80’s. Throughout 2014 and beginning of 2015 the movement of the $AUD stayed fairly flat with the dollar equalling approximately in the high 90’s to possible 100’s. Although throughout 2015 there was a slight appreciation into 100’s with then depreciation back into the mid 90’s. With this the Japanese Yen currently now sits at a 95.78 compared to the Australian dollar.
The Australian dollar equals to 0.68 Euro. The Australian dollar in relation to the Euro has been fairly unstable within the last five years but specifically within the last two years since 2013 there have been frequent appreciations and depreciations within comparison with the two currencies.
Throughout the past five years as shown within the graph the Ausralian dollar has been fairly stable compared to the British Pound with only a slight deapprepciation here and there. More recently over the past two years since 2013 there as been a slow but constent deapprepciaiton resulting in the current position of the Australian dollar equallying to 0.49 British Pound in 2015.
Over the past two years there has been a drastic deappreciation of the Ausralian dollar in relation to the Us dollar, with it currently sitting at the Australian dollar…