Exchange rates vary regularly with different market factors affecting it such as inflation and terms of trade. In fact, the rates may be changing as you read this.
If you are planning to send or receive funds from Australia and Philippines, you need to keep an eye on the exchange rates as well as the factors that affect it.
1. Inflation Rate
A change in the country’s inflation rate causes a change in the value of its currency. For instance, you can observe a depreciation in currency if the country experiences high inflation. This high inflation is usually accompanied by higher interest rates.
On the other hand, you can observe an appreciation in currency if the country experiences low inflation. If inflation is low, the prices of goods and services increase at a slower pace. Fortunately for us, Philippines and Australia have relatively low inflation rates of 1.4% and 1.5% respectively (World Bank’s data as of 2015).
2. Interest Rate
Interest rates dictated by central banks influence the customer and investor behavior. Interest rates affect the borrowing behavior of customers. For instance, if the economy is overheated, the central banks may raise its interest rates to make borrowing more costly and to slow down the rate of inflation.
For the investor behavior, the interest rates affect the balance between the investor’s yield returns and safety of funds. For instance, the yields for assets in a particular currency go up as interest rates increase. This leads to an elevated demand by investors and eventually leads to the appreciation of that particular currency.
3. Government Bank
The country’s government bank has the ability to affect the exchange rate by buying up or selling off a foreign currency. This is one of the important factors that affect the exchange rate of the Philippines. Sometimes, Banko Sentral ng Pilipinas needs to influence the exchange rate in order to keep our exports more competitive and to stabilize the domestic currency.
4. Trade Balance
According to researchers that studied Australia’s exchange rates from the 70s to 80s, Australian dollars (AUD) tend to be influenced by terms of trade or trade balance. A balance of trade is calculated when you get the country’s total value of exports minus the total value of imports. This trade balance influences the supply and demand for the said country’s currency.
To illustrate, when Australia has a trade surplus (positive trade balance), demand for AUD increases because foreign customers must exchange their domestic currencies in order to purchase Australian goods. While a trade deficit (negative trade balance) can lead to the devaluation of AUD.
5. Mining Economy
Another major driving force that influences the value of Australian dollars is mining.
Over the past decade, boost in Australia’s mining contributed to the near-50% appreciation of its currency value. This boost has been largely attributed to the rising demands for Australian commodities in the expanding Chinese economy.
6. Public Debt
The public debt or government debt is the balance owed by the central government. Countries with great amounts of public debt are less likely to acquire foreign investors and foreign capital. As a result, a decrease in the value of their currency exchange rates can follow.
Between Australia and Philippines, the later should be concerned about its whopping USD 163,934,972,678 as of early 2016. This translates to about USD 1,515.28 or PHP 70,477.18 worth of debt per person.
If you remit frequently, being updated with these factors will help you to evaluate the best time for international funds transfer.