Exchange Rate Regime and Historical Exchange Rate Analysis of AUD/USD

The report tends to outline the exchange rate regime of the chosen foreign currency i.e. United States dollar or USD. Further, the historical exchange rate change on a monthly basis for the last 10 years has been computed using the data from RBA. The standard deviation of these changes has come out as 3.9% and hence indicates volatility over the period with no clear trend. On the whole, AUD has depreciated against USD in the period under consideration. Also, the distribution of the exchange rate change is non-normal owing to presence of negative skew. One of the key reasons is events such as global financial crisis which resulted in extreme currency movements.

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Executive Summary
The report tends to outline the exchange rate regime of the chosen foreign currency i.e. United
States dollar or USD. Further, the historical exchange rate change on a monthly basis for the last
10 years has been computed using the data from RBA. The standard deviation of these changes
has come out as 3.9% and hence indicates volatility over the period with no clear trend. On the
whole, AUD has depreciated against USD in the period under consideration. Also, the
distribution of the exchange rate change is non-normal owing to presence of negative skew. One
of the key reasons is events such as global financial crisis which resulted in extreme currency
movements.
Introduction
The given report aims to highlight the key aspects related to the historical exchange rate between
the AUD and the chosen foreign currency i.e. USD. This discussion gains significance owing to
the impact of currency exchange rates on the business of multinational organization based in
Australia. As a result, in the corporate decision making, the firm needs to consider the likely
exchange rates that would exist in the future based on empirical observations and relevant
macroeconomic factors that influence the currency exchange rate (Gitman, Juchaou & Flangan,
2016). Further, the exchange rate regime pertaining to USD would also be discussed besides the
empirical movements in exchange rate over the last ten years.
Discussion
1) Exchange Rate Regime (USD)

The USD is a floating exchange rate currency since the price of USD against various currencies
is essentially a product of the demand and supply. It is imperative to note that a host of nations
still tend to use USD as a peg or reference currency to determine the value of their respective
national currencies which further adds to the importance of stability in USD. While direct
interference by the Federal Reserve in the currency exchange rate in the US does not usually take
place, but the changes in bank rate tend to impact the currency exchange rate as the foreign fund
flow is dependent on the underlying interest rate on offer in US (Lasher, 2015). Additionally,
macroeconomic indicators such as inflation, trade, economic growth both domestically and
internationally also influence the exchange rate of USD with regards to other currencies. Price
discovery in case of USD is quite efficient since it is the most widely traded currency in the
financial markets and hence interference from any agency is not required (Mayer, et. al., 2014).
2) Monthly Exchange Rate Data
The monthly exchange rate data i.e. AUD/USD for the last 10 years i.e. from 2008 to 2017 has
been obtained from RBA (Reserve Bank of Australia) website and highlighted in Appendix 1
(RBA, 2018).
3) Change in monthly exchange rate AUD/USD
Change in exchange rate = (Exchange ratet+1 – Exchange ratet)/(Exchange ratet)*100
The above computation has been performed through excel and the result obtained is highlighted
in Appendix 1. Over the period from January 1, 2008 to December 31, 2017, the average
monthly exchange rate change stood at -0.03% which implies that the Australian dollar has
depreciated against the USD at an average monthly rate of 0.03%. Additionally, the

corresponding standard deviation for monthly exchange rate stood at 3.9% for the same period
which implies that the monthly exchange rate has been volatile (Bruner, 2013).
4) Histogram of change in monthly exchange rate
The requisite histogram has been drawn in excel with the relevant screenshot shown below.
The above histogram highlights the monthly frequency with which a given class of monthly
exchange rate (AUD/USD) has occurred over the last ten years i.e. January 1, 2008 to December
31, 2017. On the basis of the above histogram, it would be fair to conclude that the given
distribution is normal. This is because the histogram is not symmetric and instead has a negative
skew owing to presence of a lengthier left tail as is apparent (Danthine & Donaldson, 2015).
It is apparent that extreme values are indeed present especially on the negative side where there
have been instances when the monthly depreciation in AUD with respect to USD has been in

excess of 12%. A case in point is during October 2008 when AUD depreciated by 16.46%
against the USD. This was at the height of the global financial crisis when there was money
flowing out of foreign countries and being parked in the US in the form of USD. As a result, this
period saw depreciation of a host of currencies against the USD. Other extreme observations in
terms of AUD depreciation have been witnessed during the latter half of 2008 only. On the other
hand, some of the higher values of appreciation in AUD against the USD were witnessed in 2009
when there were foreign inflows and improving economic growth (Brigham & Houston, 2014).
Also, in context of exchange rate, the mineral trade from Australia is a vital factor considering
the contribution of the same to the trade balance and the fluctuation of the price of the same in
the recent years. As a result, there has been lowering trade surplus which is also one of the
contributing reasons towards the depreciation of AUD observed over the period (Bruner, 2013).
Conclusion
On the basis of the above discussion, it may be concluded that the exchange rate of USD is
essentially floating and is determined on the basis of demand supply factors which in turn tend to
depend on a host of macroeconomic indicators. Additionally, considering that USD is considered
as a reference for certain other national currencies and is quite widely traded, hence the exchange
rate is essentially determined by the forces of market. Also, in context of AUD/USD, it is
apparent that over the last 10 years, on an average the AUD has depreciated against the USD at a
rate of 0.03% per month. Besides, the exchange rate movement on a monthly basis has been
quite volatile thus resulting in a standard deviation of 3.9% (Mayer, et. al., 2014). Also, the
distribution of the exchange rate OF AUD/USD over the period from 2008-2017 is non-normal
owing to presence of negative skew (Burton, Renold & Lombra, 2016). Additionally, there is

presence of certain extreme values especially with regards to depreciation of AUD against the
USD which were observed during the peak of the global financial crisis i.e. 2008.

References
Brigham, E. F. & Houston, J. F., (2014). .Fundamentals of Financial Management (14th ed.).
Boston: Cengage Learning.
Bruner, R. F., (2013). Case Studies in Finance (7th ed.). New York City: McGraw-Hill Education.
Burton, M., Reynold, N. & Lombra, R., (2016) An Introduction to Financial Markets and
Institutions (2nd ed.). New York City: Routheldge.
Danthine, J. P. & Donaldson, J. B, (2015). Intermediate Financial Theory (2nd ed.). Cambridge:
Academic Press.
Gitman, L.J., Juchaou, R., & Flanagan, J. (2016). Principles of Managerial Finance (6th ed.). NSW:
Pearson Australia.
Lasher, W. R., (2015) Practical Financial Management (5th ed.). London: South- Western
College Publisher.
Mayer, R. C., McGuigan, J. R., & Kretkow, W. J. (2014). Contemporary Financial Management
(10th ed.). London: South- Western College Publisher.
RBA.GOV.AU. (2018). The Exchange Rate and the Reserve Bank’s Role in the Foreign
Exchange Market. [online] Available at: https://www.rba.gov.au/mkt-operations/ex-rate-
rba-role-fx-mkt.html [Accessed 3 Aug, 2018].
Appendix 1