Balance of payments question (2019 hsc eco) (1 Viewer)

Autobot6908

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Could you say that depreciating the AUD will force investors to move away from Australian investment and towards foriegn investment via the selling of the AUD? --> Hence worsening the FA in the KAFA? Thanks.
 

grouchygigi

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I think what you're saying is actually false.
  • First of all, I think the exchange you are referring to is not investment but actually speculative buying and this means that it would not affect the KAFA. If the AUD depreciated, people are actually more likely to invest into Australia because the dollar is at a cheap price, hence any investment, whether direct or portfolio would become cheaper. E.g. right now AUD is super low against USD, meaning US people can easily invest in Australia, so they are likely to buy AUD in order to invest. However, speculative buyers who buy AUD not for any reason but for the value to go up and then they sell to make profit, they don't buy any shares or develop any projects, they would sell. So there is a small difference to note.
  • Secondly, as above, I don't really see why investors would stop investing in AUS shares or any developmental projects and if this is what you meant, I would say there is a lacking mechanism as to why they would sell them? I guess it would be worth less by a little in terms of your currency but people invest in shares so the value of the shares go up more often than because the price of that currency is increasing? So the effect would be not very direct.
I think some things you could say instead are the effects on BOGs, cuz cheaper exports mean more international competitiveness. Like for example, people are going to Japan and buying Japanese goods because the yen is weak. In terms of debts in the KAFA and debt servicing costs in the CA, because debts are recorded in foreign currencies, it would take more AUD to pay back if it is worth less so the debts increase (i think this is called the valuation effect). There are a lot of other things you can say as well as what you are saying, however I think if you wanted to say that, there would be more investment not less investment.
 

Hehehe22

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I think it's definitely possible that a constantly depreciating currency may deter investors because it is a sign of a weakening economy, but be careful saying "force", because nothing is forcing them to do anything. It all depends on their future expectations, and whether they think the economy will recover.

You should also note that FDI isn't readily removable to shift to other countries, only portfolio investment is. However, as grouchygigi said, any form of investment would become cheaper, driving demand. Also, rising import prices as a result of currency depreciation can lead to imported inflation, which central banks would respond to by increasing the cash rate. This causes increases in interest rates and thus the rate of return on investment, which can encourage speculators to invest, boosting capital inflows.
 

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