RDP 9010: Volatility of the Australian Dollar Exchange Rate 3. Volatility of the Australian Dollar

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

December 1990

Table 1 shows the volatility of daily changes in the Australian dollar for each of the past ten years and for two sub-periods; pre-float – beginning 1980 to 9 December 1983 (1980–1983) – and post-float – 12 December 1983 to end 1989 (1984–1989). Using the measures outlined, volatility is calculated for the AUD/USD exchange rate and for two measures of the dollar's effective exchange rate. The first is the traditional bilateral trade-weighted index as published by the Reserve Bank, while the other is derived from the IMF's multilateral exchange rate model (MERM).[6]

The Table shows that floating the Australian dollar has been accompanied by an increase in exchange rate volatility. The generally higher volatility in 1983 compared with earlier years reflects the impact of the 10 per cent devaluation of the currency early in that year and speculative pressures in the foreign exchange market towards the end of the “crawling peg” regime.

Focusing on the six years since the float, the pattern of Australian dollar volatility is the same for each measure. The volatility of the dollar was generally higher in 1989 than it was during the first year of the float, but not as high as in either 1985 or 1986, and in line with the average for the post-float period. The volatility evident around the middle of the decade reflects uncertainties associated with strong downward movements in the value of the Australian dollar during that period.

Table 1 Australian Dollar Volatility
  Standard
Deviation of
Daily Percentage
Change 		Average
Absolute
Daily Percentage
Change
AUD/USD
1980 0.22 0.16
1981 0.29 0.22
1982 0.24 0.19
1983 0.69 0.22
1980–1983 0.40 0.20
1984 0.48 0.36
1985 1.03 0.74
1986 0.76 0.52
1987 0.57 0.41
1988 0.64 0.49
1989 0.72 0.51
1984–1989 0.73 0.51
TWI
1980 0.06 0.03
1981 0.09 0.06
1982 0.10 0.05
1983 0.68 0.14
1980–1983 0.34 0.07
1984 0.41 0.30
1985 0.88 0.61
1986 0.75 0.49
1987 0.59 0.40
1988 0.51 0.38
1989 0.65 0.45
1984–1989 0.65 0.44
IMF AUD MERM
1980 – –
1981 – –
1982 0.26 0.20
1983 0.68 0.23
1980–1983 0.51 0.21
1984 0.45 0.34
1985 0.95 0.64
1986 0.78 0.53
1987 0.62 0.43
1988 0.54 0.40
1989 0.68 0.49
1984–1989 0.69 0.47

The volatilities shown in the Table are calculated using movements in the Australian dollar over a 24 hour period and, thereby, incorporate exchange rate movements in both the onshore and offshore markets. Since the offshore market is fragmented between various centres and generally lacks the depth of the local market, the scope for sizeable transactions to disturb the currency in the offshore market should be correspondingly greater. In an attempt to identify the volatility in the two markets, Table 2 shows the volatility of the Australian dollar in the Sydney market between 9.00 a.m. and 4.00 p.m – defined as the onshore market – and the volatility of the dollar outside of these hours, that is, in the offshore market.[7]

Table 2 Onshore and Offshore Volatility
  1984 1985 1986 1987 1988 1989 1984–1989
Standard Deviation of Daily Percentage Change
AUD/USD:
onshore 0.35 0.60 0.48 0.36 0.37 0.47 0.45
offshore 0.46 0.97 0.62 0.49 0.58 0.63 0.65
AUD/TWI:
onshore 0.37 0.59 0.50 0.37 0.34 0.44 0.45
offshore 0.36 0.81 0.59 0.49 0.41 0.53 0.55
Average Absolute Daily Percentage Change
AUD/USD:
onshore 0.25 0.42 0.32 0.25 0.25 0.31 0.30
offshore 0.33 0.71 0.43 0.36 0.46 0.45 0.46
AUD/TWI:
onshore 0.25 0.40 0.34 0.26 0.23 0.30 0.30
offshore 0.24 0.57 0.41 0.35 0.33 0.37 0.38

The results show that, while the pattern of volatility in both markets is the same over the years (as detailed in Table 1), the volatility of the Australian dollar is lower in the local market than in the offshore market in almost all years.

Footnotes

For a description of the IMF's MERM, see Artus and Rhomberg (1973) and Artus and McGuirk (1981). [6]

This differentiation between the onshore and offshore market is dictated by data and is not precise; active trading often takes place in the Australian market before 9.00 a.m. and after 4.00 p.m. [7]