The Reserve Bank of Australia (RBA) plays a crucial role in managing the Australian economy and maintaining stability in the Australian dollar (AUD) exchange rate (Kent 2022). The AUD/USD exchange rate is an important indicator of the Australian economy's health, and the RBA's reaction to the factors affecting this rate is critical for the foreign market. In this blog, we will discuss some of the factors that has contributed to the declining value of AUD and the invention of the RBA to the foreign exchange market.
Graph 1: AUD/USD Exchange Rate
Source: RBA
The Australian dollar has
had a difficult year, with its value continuously falling against the US dollar
(AUD/USD) since April till date. As of December 6, 2022, the Australian
dollar's year-to-date performance versus the US dollar was -7% (Piero, 2022). From
the graph above, the AUD/USD exchange rate has fluctuated between a low of
around 0.68 USD per AUD and a high of around 0.67 USD per AUD. However, there
has been a massive climb of 0.71 USD per AUD. There have been several factors
that have influenced the exchange rate, including changes in interest rates,
economic growth, and geopolitical events which will be covered in this blog.
In early 2022, the
AUD/USD exchange rate was impacted by rising interest rates in the United
States (Sophie and Johanna 2022).
This resulted in a decline in the value of the Australian dollar relative to
the US dollar, with the exchange rate falling to a low of around 0.68 USD per
AUD in March 2022. However, in the second half of 2022, the AUD/USD exchange
rate started to recover. This was due to several factors, including a rebound
in demand for commodities, particularly iron ore, which is a key export for
Australia. This led to an increase in the value of the Australian dollar
relative to the US dollar. According to data from Westpac, the Australian
dollar was 0.738 cents to the US dollar in March 2022. In April, 0.736; May,
0.705; June, 0.702; July 0.686; a slight increase in August to 0.696; and back
down significantly to 0.667 for the month of September (Sophie and Johanna 2022).
How does the Reserve bank
intervene in the foreign exchange market?
In general, the Reserve Bank
intervene by transacting in the foreign exchange market under its own name in
order to alert market players to its presence. This 'announcement effect' can
have a considerable impact on the currency rate since it informs the market
about the Reserve Bank's policy views on the exchange rate (RBA, 2020). Banks
will raise their Australian dollar offer quotations, for instance, if the
Reserve Bank wishes to sell US dollars and buy Australian dollars. Second, this
can lead to further price changes among market makers in the spot foreign
currency market after banks have transacted with the Reserve Bank (RBA, 2020).
References
Atkin T. Caputo, M. Robinson,
T. and Wang, H., 2014. Macroeconomic consequences of terms of trade episodes, past and present, RBA Research Discussion Paper No 2014-01.
Atkin T. and La Cava G., 2018.
The transmission of monetary policy: How Does It
Work?’, RBA Bulletin, September.
Sophie, V. and Johanna L.,
2022. AUD To USD Forecast: Dollar Could Fall Further Amid US Recession Fears.
[online] Available at: https://www.forbes.com/advisor/au/investing/currencies/aud-to-usd-forecast-and-trends/.
Guo J. Ranasinghe, D. and
Zhang, Z., 2019. Developments in foreign exchange and over-the-counter derivatives Markets’, RBA Bulletin, December.
Kent, C., 2022. Exchange rates and inflationary pressures | Speeches. [online] Reserve Bank of Australia. Available at:
https://www.rba.gov.au/speeches/2022/sp-ag-2022-10-24.html
Piero C., 2022. Australian dollar (AUD/USD) 2023 price
outlook: Aussie to soar on China’s reopening and Fed pivot? [online] Available
at: https://capital.com/australian-dollar-aud-usd-2023-price-outlook-aussie-to-soar-on-china-s-reopening-and-fed-pivot.
Reserve Bank of Australia, 2020. The Exchange Rate and
the Reserve Bank’s Role in the Foreign Exchange Market. [online] Reserve Bank
of Australia. Available at:
https://www.rba.gov.au/mkt-operations/ex-rate-rba-role-fx-mkt.html#eight
[Accessed 23 Mar. 2023].
Newman V. Potter, C. and Wright,
M., 2011. Foreign exchange market intervention, RBA Bulletin, December.
Stevens G., 2013. The australian dollar: Thirty years of floating, Address to the Australian Business Economists’
Annual Dinner, Sydney, 21 November.
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