RDP 9010: Volatility of the Australian Dollar Exchange Rate 4. Volatility of the Australian Dollar Relative to Other Currencies

Lindsay F. Boulton, Mardi H. Dungey and Melissa B. Parkin

December 1990

Table 3 shows the volatility of the AUD/USD exchange rate together with the volatilities of the Swiss franc, Deutschemark, Japanese yen and sterling against the US dollar.

Table 3
Volatility of the Australian Dollar and
Other Selected Currencies Against the US Dollar
  AUD CHF DEM JPY STG
Standard Deviation of Daily Percentage Change
1980 0.22 0.76 0.60 0.81 0.56
1981 0.29 1.04 0.96 0.72 0.90
1982 0.24 0.81 0.66 0.76 0.61
1983 0.69 0.61 0.56 0.57 0.60
1980–1983 0.40 0.82 0.72 0.72 0.68
1984 0.48 0.67 0.75 0.45 0.63
1985 1.03 1.04 1.00 0.63 1.20
1986 0.76 0.86 0.82 0.76 0.72
1987 0.57 0.78 0.71 0.71 0.64
1988 0.64 0.69 0.65 0.64 0.69
1989 0.72 0.81 0.74 0.72 0.72
1984–1989 0.73 0.82 0.79 0.66 0.79
Average Absolute Daily Percentage Change
1980 0.16 0.55 0.42 0.59 0.43
1981 0.22 0.82 0.74 0.56 0.68
1982 0.19 0.64 0.51 0.59 0.48
1983 0.22 0.47 0.44 0.43 0.45
1980–1983 0.20 0.62 0.53 0.55 0.51
1984 0.36 0.53 0.59 0.32 0.50
1985 0.74 0.77 0.76 0.43 0.88
1986 0.52 0.68 0.64 0.54 0.55
1987 0.41 0.59 0.53 0.53 0.50
1988 0.49 0.50 0.49 0.45 0.51
1989 0.51 0.62 0.56 0.52 0.52
1984–1989 0.51 0.61 0.59 0.46 0.57

The Table shows that between 1980 and 1983, the Australian dollar was less volatile than the major currencies, reflecting Australia's relatively inflexible exchange rate regime. Volatility of the australian dollar has increased since 1983, but it has generally remained lower than for the major currencies. Only the JPY/USD exchange rate has been less volatile, though in 1988 and 1989 the volatility of the Australian dollar and Japanese yen were similar.

Like the Australian dollar, most of the major currencies were more volatile against the US dollar in 1989 than they were in 1984. In addition, with the exception of the yen, all were generally more volatile against the US dollar in 1985 and 1986 than in other years. This suggests that while domestic factors may be the main explanation behind the volatility of the Australian dollar around the middle of the decade, the backdrop was a greater degree of turbulence in world foreign exchange markets.

An alternative to measuring bilateral exchange rate volatility is to compare movements in effective exchange rates. Such a comparison is made in Tables 4 and 5 below. Table 4 shows the volatility of weekly movements in trade-weighted indices of the Australian dollar and several other currencies. For each currency, the component currencies of the index are weighted according to bilateral trade flows.[8] Table 5 compares volatilities calculated from daily movements in the IMF's MERM effective exchange rate series where the weights attached to the component currencies are calculated on the basis of multilateral trade flows.

Tables 4 and 5 show that since 1983 the Australian dollar, on a trade-weighted basis, has been more volatile than the other major currencies. However, care needs to be exercised in interpreting these results. The variability of a currency's trade-weighted index comprises both the variances and covariances of its component currencies. In general, the Australian dollar exhibits less covariation with the currencies of Australia's major trading partners compared with the covariance between, say, the US dollar and the currencies of the United States' major trading partners. As a consequence, the volatility of the Australian dollar trade-weighted index will be higher than the trade-weighted indices of other major currencies. It is not obvious why the covariation of the Australian dollar with the currencies of our major trading partners is relatively low. However, it is likely to reflect the importance of commodity prices in determining movements in the Australian dollar compared with most other major currencies.[9] Furthermore, in the case of the IMF's MERM effective exchange rates, some of the divergence between volatilities may be due to problems in estimating import and export demand equations across broad categories of traded goods.

Table 4 Volatility of the Australian Dollar and Other Selected Effective Exchange Rates (TWI)
  AUD USD CHF DEM JPY STG
Standard Deviation of Weekly Percentage Change
1980 0.12 0.76 0.67 0.42 1.16 0.80
1981 0.30 0.99 0.86 0.60 1.09 1.11
1982 0.29 0.85 0.71 0.37 1.27 0.74
1983 1.07 0.63 0.57 0.39 0.69 1.06
1980–1983 0.57 0.82 0.72 0.46 1.08 0.95
1984 0.82 0.73 0.42 0.32 0.68 0.62
1985 1.71 1.30 0.67 0.33 1.11 1.24
1986 1.42 0.89 0.63 0.36 1.16 0.97
1987 1.16 0.74 0.40 0.26 1.00 0.64
1988 0.91 0.77 0.35 0.21 0.87 0.72
1989 1.24 0.96 0.59 0.29 0.97 0.71
1984–1989 1.26 0.93 0.53 0.30 0.99 0.86
Average Absolute Weekly Percentage Change
1980 0.12 0.59 0.51 0.31 0.95 0.66
1981 0.24 0.84 0.67 0.40 0.85 0.84
1982 0.22 0.72 0.55 0.29 1.01 0.49
1983 0.47 0.53 0.42 0.31 0.51 0.77
1980–1983 0.26 0.67 0.54 0.33 0.84 0.69
1984 0.67 0.62 0.33 0.26 0.40 0.48
1985 1.25 0.90 0.53 0.25 0.59 0.93
1986 1.07 0.72 0.49 0.33 0.92 0.75
1987 0.83 0.60 0.30 0.19 0.78 0.49
1988 0.74 0.57 0.30 0.17 0.57 0.52
1989 0.84 0.75 0.39 0.24 0.74 0.54
1984–1989 0.90 0.69 0.39 0.24 0.67 0.62
Table 5 Volatility of the Australian Dollar and Other Selected Effective Exchange Rates (MERM)
  AUD USD CHF DEM JPY STG
Standard Deviation of Weekly Percentage Change
1982 0.26 0.48 0.47 0.29 0.62 0.52
1983 0.68 0.38 0.66 0.25 0.43 0.56
1980–1983 0.51 0.43 0.57 0.27 0.53 0.54
1984 0.45 0.45 0.31 0.33 0.39 0.37
1985 0.95 0.62 0.57 0.41 0.57 0.69
1986 0.78 0.47 0.49 0.38 0.68 0.62
1987 0.62 0.47 0.41 0.29 0.58 0.39
1988 0.54 0.45 0.34 0.25 0.50 0.39
1989 0.68 0.51 0.43 0.63 0.58 0.44
1984–1989 0.69 0.50 0.43 0.40 0.56 0.50
Average Absolute Weekly Percentage Change
1982 0.20 0.39 0.36 0.23 0.48 0.30
1983 0.23 0.29 0.29 0.19 0.32 0.36
1980–1983 0.21 0.34 0.33 0.21 0.40 0.33
1984 0.34 0.36 0.23 0.25 0.25 0.28
1985 0.64 0.45 0.39 0.28 0.35 0.50
1986 0.53 0.36 0.39 0.27 0.48 0.45
1987 0.43 0.36 0.31 0.22 0.43 0.29
1988 0.40 0.32 0.26 0.18 0.34 0.29
1989 0.49 0.38 0.32 0.28 0.42 0.32
1984–1989 0.47 0.37 0.32 0.25 0.38 0.35

Footnotes

Volatility of these series is calculated from weekly rather than daily movements. Consequently, the results in Table 4 are not comparable with those in the previous three tables. Australia's effective exchange rate is represented by the Reserve Bank of Australia's bilateral trade-weighted index. Trade-weighted exchange rates for the other currencies were obtained from various issues of JP Morgan's World Financial Markets. [8]

See Blundell-Wignall and Gregory (1990), and Horton (1989). [9]