Quick questions on The Australian dollar exchange rate: determinants and effects (HSC Economics Topic 2)

The exchange rate is the price of one currency expressed in terms of another. Three regimes:

The foreign exchange market for AUD has:

The standard diagram has the AUD price (USD per AUD) on the y-axis and quantity of AUD on the x-axis. A rightward shift in demand for AUD (or leftward shift in supply) raises the equilibrium price (appreciation). A leftward shift in demand (or rightward shift in supply) lowers it (depreciation).

Australia's exports are commodity-intensive. A rise in iron ore prices raises foreign demand for AUD. The AUD/USD correlates strongly with the terms of trade (correlation coefficient roughly 0.7 over the past 20 years).

When Australian interest rates are higher than overseas, foreign investors demand AUD-denominated assets. The "carry trade" is a major source of AUD demand. The RBA-Fed rate differential is a key driver.

Currency traders speculate on AUD movements based on macro data releases (US Fed announcements, ABS inflation, RBA decisions). About 90 percent of daily forex turnover is speculative rather than trade-related.

Persistent higher Australian inflation reduces the AUD's purchasing power, putting downward pressure on the nominal rate (purchasing power parity).

Geopolitical shocks affect risk-on or risk-off sentiment. The AUD is a "risk-on" currency: it weakens during global crises (March 2020 fall to USD 0.55) and strengthens during global recoveries. In other words, the AUD normally appreciates in "risk-on" conditions (when global investors seek higher-yielding, growth-sensitive assets) and depreciates in "risk-off" episodes such as the March 2020 shock (when investors flee to safe havens), so calling the AUD a "risk-on currency" and calling March 2020 a "risk-off shock" describe the same relationship from opposite sides.

The RBA holds foreign exchange reserves to intervene if the AUD is "disorderly" (extreme volatility). Direct intervention is rare; the RBA last intervened heavily in 2008.

Say whether the curve moves left or right and why, then read off the new equilibrium price and quantity.

"The AUD depreciates during global shocks" is weaker than "the AUD fell to about USD 0.55 in March 2020 (RBA)". Keep the cash rate (around 3.6 percent, mid-2026, illustrative ExamExplained) and the AUD/USD range (about USD 0.62 to 0.70, 2024-26) ready to cite.