30 years of Australian dollar flexible exchange rate: review and revelation

The Australian treasury decided to adopt flexible exchange rate on 12 December 1983, 8 weeks after Hong Kong dollar peg to US dollar, in order to cope with speculative bet on appreciation, and to suspend foreign exchange rate control. This became an important landmark of liberalization of economy in Australia. 30 years later, Australian dollar has become the fifth most traded currency in foreign exchange market and it has gained wider acceptance in international trade. As the merit of increasing demand of metal ores and agricultural products, especially in Asia, assets in Australia has attracted large amount of speculation funds and thus AUD has appreciated against most of the currencies in the world.

Since 1983, AUD has been proved volatile against major currencies like USD, but the primary commodity prices expressed in AUD show a gradual increasing trend which is less volatile than other currencies, especially in earlier years of implementing flexible exchange rate regime, thus AUD exchange rate often reveals global resources demand and international investment conditions.

In the past 20 years, Reserve Bank of Australia has maintained lower price inflation and less volatile interest rate changes than before, thanked for currency supply and interest rate autonomy.

However, commodity boom from 2002 and huge investment flow into stock and property market due to immigration has led to steep appreciation and made the Australian products less competitive in global market. Global low interest rate also fuelled the land price rise.
The house prices in major cities outpace salary increase and a significant part of dwellings have risen to AUD 1 million, which have become unaffordable to general public. Leverage speculation by self managed super funds become a key factor of skyrocketing residential prices.
In addition, it posed pressure on further rent and pay rise, thus Australian goods and services become uncompetitive. Closure of Holden manufacturing plants leading to 50000 job loss, Qantas plan of slashing and outsourcing jobs are major instance for this.

In addition, food processing companies in Australia started to move manufacturing process to New Zealand, in which the wages are 25% less than Australian counterparts (despite of appreciation of New Zealand dollar against AUD). In addition, rigid and pro-union labour laws and strong labour union presence in Australia also prompted the companies to shift the works.

Although flexible exchange rate helped the authorities to adjust currency supply, interest rate and fiscal policies fit to local economic situation, this has caused vigorous changes of exchange rate because the authorities are powerless to turbulent capital flows. High exchange rate and surging land price for years have proven to be hurt the growth of actual economy in Australia.

In order to reduce harmful impact of currency fluctutation due to external factors, the Reserve Bank of Australia should adopt controlled flexible exchange rate based on commodity prices, exchange rate of major convertible currencies and price inflation within a band, as say 12%. That can stabilize export prices in order to promote manufacturing sector. This can prevent rapid increase of prices of import nations. Also, more job positions can be provided in Australia and living standard of Australian citizens can be maintained.

Reference:
'Dollar float good for Aust: Keating', Business Spectator, 12 December 2013, URL: http://www.businessspectator.com.au/news/2013/12/12/australian-dollar/dollar-float-good-aust-keating , retrieved on 12 December 2013.
http://www.imf.org/external/pubs/ft/pdp/2007/pdp02.pdf
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.203.1540&rep=rep1&type=pdf
Exchange rate policy by IMF: http://www.imf.org/external/pubs/ft/issues13/index.htm

reports: http://www.dailytelegraph.com.au/business/jessica-irvine/happy-30th-birthday-to-our-floating-aussie-dollar/story-fnj45kvd-1226763657590
http://www.dailytelegraph.com.au/news/nsw/real-estate-price-surge-for-sydney-property-market/story-fni0cx12-1226690654418
http://www.dailytelegraph.com.au/technology/federal-government-calls-on-holden-boss-mike-devereux-to-give-australia-the-truth-about-its-future/story-fnjwq1p2-1226779214737
http://au.news.yahoo.com/a/19462454/vic-house-prices-soar-to-record-highs/
http://www.spaa.asn.au/ceo-blog/blog/2013/perfect-storm-in-a-teacup-warnings-of-smsf-property-moneytrap-not-backed-by-figures.aspx#.UqmXf47yzIU