how does inflation impact the AUD? (1 Viewer)

[Hiheyhello]

heyy, so basically with eco, I always make sure that I understand everything that I read and put in my notes, however, there is just one concept that I haven’t been able to get my head around. Why would foreign exchange markets (or investors I guess) lose confidence in our economy if we’re experiencing high inflation (thus leading to a depreciation of the AUD as demand decreases)??

 

[DarkOperator618]

cus they need to spend more overseas currency (i.e. more USD), only for a smaller AUD value. So yea

 

[Hiheyhello]

right, so is it because inflation decreases the purchasing power of foreign investors specifically in Australia???
like I don't see how the AUD would lose it's value overseas, so would that just be in a domestic context, if foreign investors needed AUD to invest in like an Australian company ?

 

[jimmysmith560]

cus they need to spend more overseas currency (i.e. more USD), only for a smaller AUD value. So yea

A depreciation of the Australian dollar makes it easier for the foreign party to acquire more AUD because the AUD would've become less valuable (cheaper).

Going back to Hiheyhello's original question, foreign investors/exchange markets lose confidence in the Australian economy if Australia is experiencing high inflation because high inflation is connected to the depreciation of the Australian dollar. A depreciation of the AUD indicates that Australia does not have a stable currency/economy and could constitute a warning sign for potential foreign investors to reconsider their investment decision, which could lead to either outcome:

• Delay their investment in case they are confident the depreciation/high inflation are temporary
• Conclude that it is not safe to proceed with their investment and cancel their investment as a result

The Reserve Bank of Australia aims to keep the inflation rate between 2-3%, which is a rate that is sufficiently low that it does not materially distort economic decisions in the community.

From the perspective of the foreign business, a depreciation in the currency of the host country (in this case Australia) may cause a significant detriment to the business's sales and profits in Australia (assuming their transactions use the AUD within Australia) because the value of the AUD has decreased.

Countries with stable currencies/economies are seen as a more suitable option for investment. Such currencies include the US dollar and the Euro.

Though there will surely be more export activity as Australian goods and services become much cheaper for foreign customers (individuals and businesses), following the depreciation of the AUD.

I thought I'd also include some links which I believe may be useful if you need more information:

Inflation Target

www.rba.gov.au

Exchange Rates and the Australian Economy | Explainer | Education

This series provides short, concise explanations for various economics topics.

www.rba.gov.au

I hope this helps!

 

[satvik_1008]

heyy, so basically with eco, I always make sure that I understand everything that I read and put in my notes, however, there is just one concept that I haven’t been able to get my head around. Why would foreign exchange markets (or investors I guess) lose confidence in our economy if we’re experiencing high inflation (thus leading to a depreciation of the AUD as demand decreases)??

basically inflation has a tonne of really fucked effects on the economy, and usually inflation = bad economic managment. Also inflation erodes the purchasing power of the currency. (one of the primary functions of money is to be a store of value so if it can't do that coz its value is being eroded, thats kinda gg)
thus, if investors see a currency seeing rampant inflation, they are bound to become frightened and shriek away

 

[satvik_1008]

heyy, so basically with eco, I always make sure that I understand everything that I read and put in my notes, however, there is just one concept that I haven’t been able to get my head around. Why would foreign exchange markets (or investors I guess) lose confidence in our economy if we’re experiencing high inflation (thus leading to a depreciation of the AUD as demand decreases)??

think about it this way. would you buy a currency now that will buy half the amount of goods and services the next day? no