An exchange rate is the value of one currency in terms of another currency. The exchange rate can have an important influence on economic activity, inflation and the balance of payments in a small open economy such as Australia.
Exchange rates are measured in different ways and, over the years, there have been different operational arrangements for determining the value of Australia's exchange rate. Currently, Australia has a floating exchange rate, and it is the fifth most traded currency in foreign exchange markets.
International Market Operations
Watch Deputy Governor Guy Debelle explain why the Reserve Bank operates in the foreign exchange market.
Guy Debelle, Assistant Governor (2007 – 2016)
The Bank has two roles: it operates in the domestic market and it operates in international markets.
The Bank owns the country's foreign exchange reserves, they are actually on our balance sheet, and we manage them on behalf of the country.
We operate in the foreign exchange market for two reasons. One is to give us the capacity to intervene in the market when conditions require. So, for instance, in 08/09 conditions in the foreign exchange market here and globally deteriorated; liquidity was very sparse and we stepped in to provide liquidity into that market. The intervention episodes are generally fairly few and far between. We haven't intervened or felt the need to intervene in the market since 08/09.
We also operate in the FX market every day of the week, because we do the Government's foreign exchange transactions for them. So every day, if the Government needs to pay some bill in foreign exchange, we'll provide money to an embassy offshore. We provide that money to the Government out of the foreign exchange reserves. We then go back into the market and replenish the foreign exchange reserves back to where we want them to be.
So the idea in managing the reserves is that we hold reserves to have sufficient liquidity for us to be able to intervene in the market when we need to. Normally we're not going to get a lot of advance notice of that, so the reserves have to have a certain degree of liquidity. Besides that, we aim for a diversity across the portfolio and that the portfolio has only the highest credit.
We hold roughly half of the portfolio in US dollars, about 30 per cent in Euro and then some in Japanese Yen, the Canadian dollar and the RMB, which we've only started investing in relatively recently.
We have a global operation. All our domestic operations are done out of the Sydney office, but we have offices in New York and London to manage the foreign exchange reserves portfolio. So the US dollar and the Canadian dollar portfolio are managed out of New York, the Euro portfolio is managed out of London, and then the Yen and RMB portfolio and the oversight of the portfolio as a whole is done out of Sydney.
So just like in the domestic market, we're transacting in those global markets every day. For instance, we hold about half of our portfolio as I said in US dollars; most of them are in US Treasuries, so we're dealing in the US Treasury market every day which gives us direct insight as to how the market is functioning. Similarly, in the FX market, because we're transacting in the market every day of the week, that gives us a good insight into how conditions are unfolding in that market.
Explains what monetary policy is, what it aims to achieve and how monetary policy decisions are both made and implemented.
Describes how changes made by the Reserve Bank to the cash rate – the ‘instrument’ of monetary policy – flow through to economic activity and inflation.
Describes the Australian cash market and explains how the Reserve Bank ensures that the cash rate is as close as possible to its target.
Describes the inflation target, why the Reserve Bank targets inflation and how the target works.
Describes how inflation is measured, explains how different indicators of underlying inflation are calculated, and outlines some of the limitations of using the Consumer Price Index.
Explains how the unemployment rate is measured and describes the main types of unemployment.
Explains how changes in the value of the Australian dollar affect economic activity and inflation in Australia, along with the nation's balance of payments.
Explains the concept of an exchange rate, how exchange rates can be measured and the different types of exchange rate regimes that exist.
Discusses the causes of the terms of trade boom of 2005 to 2012 and explains the way in which it affected the Australian economy.
Summarises the main causes of the global financial crisis, how the crisis unfolded and how policymakers responded to it in Australia and abroad.
Roles and Functions
The presentation summarises the roles and functions of Australia's central bank.
Monetary Policy and Current Economic Conditions
This presentation summarises the monetary policy framework and current economic conditions in Australia.
The cash rate is updated to 2 October 2018, graphs with forecasts are updated to 9 August 2018, and other data are updated to 27 September 2018.
Opening the Vault
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Read and Rehash
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Key Economic Indicators – Unpacking the Snapshot
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The Transmission Mechanism
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You Make the Decision – the Cash Rate
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Perspectives on RBA decisions
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Building Charts Using RBA Statistical Tables
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