Chapter 16 - Foreign exchange: factors that influence the exchange rate. The goal is for you to learn: Explain how supply and demand issues determine an equilibrium exchange rate, consider mechanisms and relationships of factors influencing the exchange rate, explore regression analysis on variables impacting on an exchange rate. | Chapter 16 Foreign Exchange: Factors that Influence the Exchange Rate 16- Learning Objectives Explain how supply and demand issues determine an equilibrium exchange rate Consider mechanisms and relationships of factors influencing the exchange rate, including: Relative rates of inflation, national income growth, interest and exchange rate expectations and central bank or government intervention Explore regression analysis on variables impacting on an exchange rate 16- Chapter Organisation FX Markets and an Equilibrium Exchange Rate Factors that Influence Exchange Rate Movements Measuring Exchange Rate Sensitivity to Changes in Economic Variables Summary 16- FX Markets and an Equilibrium Exchange Rate Previous chapter: focused on the structure and operations of the FX markets This chapter: focuses on the factors that influence the value of a currency (in a floating exchange rate regime) in order to attempt to forecast future exchange rates with some reliability and accuracy 16- FX Markets and an Equilibrium Exchange Rate (cont.) Floating exchange rate regime One in which the value of the currency is determined by demand and supply conditions with no central bank intervention Pegged exchange rate regime Where a domestic currency is locked into a specified multiple of another currency such as the USD 16- FX Markets and an Equilibrium Exchange Rate (cont.) Demand for a currency To purchase Australian goods and services, foreigners must buy AUD Downward-sloping demand curve occurs as the devaluation of AUD results in a greater demand by foreigners For foreigners, a fall in the price of the AUD is equivalent to a reduction in the price of everything in Australia 16- FX Markets and an Equilibrium Exchange Rate (cont.) Supply of a currency Upward-sloping supply curve occurs as the quantity of AUD supplied to the FX market increases as the price of the AUD increases As the AUD appreciates, the price of foreign | Chapter 16 Foreign Exchange: Factors that Influence the Exchange Rate 16- Learning Objectives Explain how supply and demand issues determine an equilibrium exchange rate Consider mechanisms and relationships of factors influencing the exchange rate, including: Relative rates of inflation, national income growth, interest and exchange rate expectations and central bank or government intervention Explore regression analysis on variables impacting on an exchange rate 16- Chapter Organisation FX Markets and an Equilibrium Exchange Rate Factors that Influence Exchange Rate Movements Measuring Exchange Rate Sensitivity to Changes in Economic Variables Summary 16- FX Markets and an Equilibrium Exchange Rate Previous chapter: focused on the structure and operations of the FX markets This chapter: focuses on the factors that influence the value of a currency (in a floating exchange rate regime) in order to attempt to forecast future exchange rates with some
