Study on the Impact of Australia’s Monetary Policy on the Foreign Exchange Market

Through a replication analysis, this paper continues to explore the impact of Australia’s monetary policy on the foreign exchange market. The data references are drawn from the same financial literacy literature as the Reserve Bank of Australia (RBA) and Datastream by Thomson Reuters/Refinitiv. In addition to the data provided by the financial literacy literature, historical data on the exchange rate of the Australian dollar against major national currencies provided by the RBA are also used. The evidence suggests that, similar to the equity markets, the RBA’s monetary policy do not have an information effect on the foreign exchange market. The results support standard economic thinking: a rise in the interest rate leads to a rise in the Australian dollar exchange rate against major countries’ currencies. However, central banks are now becoming aware of the nature of expectations management in monetary policy. And the RBA’s behavior of increasing policy transparency and openness, and communicating with the market about monetary policy and the economic outlook, can be a good way to stabilize equity and foreign exchange markets. Although the literature on financial literacy is limited, the factors affecting the foreign exchange market do not stop at the single factor of monetary policy. The interest rates and exchange rates present a stronger correlation, with interest rates providing a better explanation of exchange rate movements.