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The Australian Dollar's Long-Term Fluctuations and Trend: The Commodity Prices-cum-Economic Cycles Hypothesis

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    Abstract

    The Australian dollar’s exchange rate (mainly in relation to the American dollar) has received a considerable attention in research and several models have been proposed to explain its trend and fluctuations. Thus, as a conclusion of this research we can say that this commodity currency very much depends on the terms of trade which in turn depend on commodity prices. The present paper is based on this conclusion and hence proposes the possibility that the Australian dollar’s behavior is overwhelmingly explained by a handful of cycles of mainly harmonic frequencies. Using the principles of Fourier analysis, a simple regression provides considerable evidence about the existence of these cycles. In addition, and as important, a search into the commodity realm demonstrates that these cycles are for example related to various cycles of mining and producing minerals. If the proposition of the present paper is true, we have a very simple yet substantial explanation of the long term trend and fluctuations of the Australian dollar exchange rate and probably of exchange rates of many other commodity currencies.

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    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow012212.pdf
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    Bibliographic Info

    Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp05-29.

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    Length: 12 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:uow:depec1:wp05-29

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    Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
    Phone: +612 4221-3659
    Fax: +612 4221-3725
    Web page: http://business.uow.edu.au/econ/index.html
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    Keywords: Australian dollar; Fourier; cycles; minerals;

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    1. Seppo Pynnonen & Juuso Vataja, 2002. "Bootstrap testing for cointegration of international commodity prices," Applied Economics, Taylor & Francis Journals, vol. 34(5), pages 637-647.
    2. Dimitris Hatzinikolaou & Metodey Polasek, 2005. "The commodity-currency view of the Australian dollar: A multivariate cointegration approach," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 81-99, May.
    3. Henry, Olan T. & Olekalns, Nilss, 2002. "Does the Australian dollar real exchange rate display mean reversion," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 651-666, October.
    4. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October.
    5. Paul Cashin & C. John McDermott, 2001. "The Long-Run Behavior of Commodity Prices," IMF Working Papers 01/68, International Monetary Fund.
    6. Tony Makin, 1997. "The Main Determinants of Australia's Exchange Rate," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(3), pages 329-339.
    7. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
    8. Karfakis, Costas & Phipps, Anthony, 1999. "Modeling the Australian Dollar-US Dollar Exchange Rate Using Cointegration Techniques," Review of International Economics, Wiley Blackwell, vol. 7(2), pages 265-79, May.
    9. Graedel, T. E. & Bertram, M. & Fuse, K. & Gordon, R. B. & Lifset, R. & Rechberger, H. & Spatari, S., 2002. "The contemporary European copper cycle: The characterization of technological copper cycles," Ecological Economics, Elsevier, vol. 42(1-2), pages 9-26, August.
    10. Cortazar, Gonzalo & Casassus, Jaime, 1998. "Optimal Timing of a Mine Expansion: Implementing a Real Options Model," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 755-769.
    11. Allan Layton, 1997. "A new approach to dating and predicting Australian business cycle phase changes," Applied Economics, Taylor & Francis Journals, vol. 29(7), pages 861-868.
    12. Cashin, Paul & McDermott, C. John & Scott, Alasdair, 2002. "Booms and slumps in world commodity prices," Journal of Development Economics, Elsevier, vol. 69(1), pages 277-296, October.
    13. Paul De Grauwe & Marianna Grimaldi, 2005. "The Exchange Rate and its Fundamentals in a Complex World," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 549-575, 08.
    14. Christopher Bajada, 2003. "Business Cycle Properties of the Legitimate and Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 397-411, December.
    15. Paul Cashin & C. John McCDermott, 2002. "The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 2.
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