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Tuesday, 7 December 1976
Page: 3363

Mr HURFORD (ADELAIDE, SOUTH AUSTRALIA) - I ask the Treasurer: Is it a fact that $ 1,000m flowed back into this country during the S working days of last week since devaluation, these funds inevitably being speculative funds? With the multiplier effect of inflows into the banking system being up to five-fold, with no changes to statutory reserve deposits, does this not mean an increase in the volume of money of up to $5,000m last week? Does this explain the 2 per cent up-valuation announced today? May we expect variations to our currency values each time there is a major inflow or outflow? How are the changes to our currency being calculated? Is the old basket being maintained? Will the Treasurer help to overcome the terrible uncertainty about these currency matters which pervades the community?

Mr LYNCH (FLINDERS, VICTORIA) (Treasurer) - I am happy to have the opportunity to answer the Dorothy Dix speech which has just been made by the honourable gentleman. It is characteristic of the honourable gentleman and those who sit with him that he should seek to create a scare in the market place at the present time. I simply want to say to the honourable gentleman that any suggestion of $1, 000m flowing into the country during the days of last week is a matter of manic speculation and is without foundation. It is not the custom of a Treasurer in this House responsibly to give daily reports on the flow of foreign capital into Australia. I should have thought the honourable gentleman would have understood that. Of course I receive those figures. The honourable gentleman is very much aware that they come out on a periodic basis through the Reserve Bank. I believe that the provision of that information best rests with the officers of the Reserve Bank. As for the change which has been made, I am sure that the honourable gentleman is aware of the statement issued this morning by Mr Harry Knight, the Governor of the Reserve Bank of Australia. For the information of the House, I seek leave to incorporate the document in Hansard.

Mr SPEAKER -Is leave granted? There being no objection, leave is granted.

The document read as follows-


The average trade-weighted exchange rate of the Aus-, tralian dollar has been adjusted as from the opening of business today.

The effect of the variation is to reduce the extent of the devaluation since Friday 26 November from 1714 per cent to 15 V4 percent.

This operational adjustment follows consideration of the exchange rate by the group of three officials designated in the Treasurer's statement of 28 November.

The change is the first of ' more frequent and smaller shifts in the relationship of the Australian dollar to the 'basket' of currencies'.

The intention is for such shifts to take place when the assessment of all relevent economic factors indicates a need for movement in the level of the exchange rate, thus permitting the use of the exchange rate as a more flexible element amongst the available arms of economic policy.

Reserve Bank of Australia SYDNEY 7 December 1976


Methods of 'pegging' the exchange rate

Past arrangements are listed below:

To December 1971-a fixed link between Australian currency and sterling.

To September 1974- a fixed link between Australian currency and the U.S. dollar. (The value of the $A was constant in relation to the currency to which it was pegged, but varied in relationship to other currencies which were not similarly pegged.)

Since September 1974- a link to movements in the average value of a 'basket' of currencies weighted in proportion to each country 's trade with Australia. (The rate for the $A has varied in relation to all other currencies, but has on average remained constant for lengthy periods.)

Comment- The fixed link between the Australian dollar and another foreign currency offered some advantages in the period prior to 1971; par values were very much the norm and exchange rates remained relatively stable in that period.

With the general move away from fixed par values to floating, a link to a single currency became less satisfactory. From December 1971 to September 1974 the U.S. dollar fluctuated, at times substantially, against other important currencies. Because of its fixed link, the Australian dollar fluctuated against other currencies to the same extent, moving with the U.S. dollar irrespective of trends in the Australian economy.

Linking the Australian dollar to a trade weighted 'basket' of currencies meant that its value tended to vary from day to day against all currencies, including the $US However, because of the averaging effect, the fluctuations against other individual currencies tended to be less extreme than with a fixed link to a single currency. Nevertheless, in the period from 25 September 1974 to 26 November 1976, the rate for the Australian dollar fluctuated under the 'basket' regime from about $A1 = U.S.$1.22 to U.S. $1.37; there were also substantial fluctuations in the rates between the $A and other currencies. These fluctuations reflected the effect of changing relationships between overseas currencies working through the trade-weighted 'basket'. The did not reflect the policy needs of Australia 's own economy.

The working of the trade-weighted 'basket'of currencies

Since September 1974, the weighted average exchange rate for Australia has been calculated by averaging the movements in exchange rates for the currencies of countries which account for virtually all of Australia's trade.

The relative importance of each of these countries in the basket is assessed by reference to our trade with them, i.e., exports and imports combined. For this reason, such exchange rate arrangements are often referred to as a (constant) trade-weighted exchange rate regime.

In practice, the averaging system used operates by calculating each day a rate for the Australian dollar in terms of the US. dollar. This is only a matter of convenience. Exactly the same result would be produced by using any other currency or, for that matter, the SDR as the numerator in the exercise.

To take a hypothetical example: Suppose Australia 's trade is limited to three countries in the following proportions:

Japan- 40 per cent

U.K.-30 per cent

U.S.A.-30 per cent

On day 1 the exchange rates for the currencies of these countries are: $US 1 - Yen 290;£ 0.66; $US 1 .

On the same day $A1=$US1.2500.

On day 2 the rates are: $US1 =Yen 300;£0.65; $US1.

In these circumstances, how is the trade-weighted value of the $A kept constant?

If no adjustment were made, the trade-weighted value of the Australian dollar would change. The extent of the change, relative to the value of day 1, would be:


In other words, if no adjustment was made, the Australian dollar would on average be worth . 93 per cent more on day 2 than on day 1. To offset this, and to keep the trade-weighted average rate at the same level as on day 1, would require a depreciation as follows:


By adopting this rate on day 2, the trade-weighted average value is kept constant.

The rate for the Australian dollar against the Yen and the £ sterling would vary as follows:

Day 1-$A1 = Yen 362.5; =£0.8250.

Day 2-$A 1 = Yen 37 1 . 6; = £0.8050.

In essence, fuller calculations of this kind have been done each day since end September 1974. The net result of these calculations and the consequent setting of the value of the $A was to leave constant between 25 September 1974 and 26 November 1976 the trade-weighted exchange rate of the Australian dollar.

On 29 November 1976, in addition to the change in the value of the Australian dollar needed to adjust it to the fluctuations in other currencies, a further downward adjustment of 17.5 per cent was made to give effect to the devaluation.

Arrangements in force from 29 November 1976:

On a day-to-day basis, the $A remains pegged to the existing trade-weighted basket of currencies; this aspect of the exchange rate regime remains unchanged.

The change that was made from 29 November affects the method of shifting the value of the $A in relation to the basket'.

The arrangements previously existing comprised a fixed link (a 'peg') to the 'basket'of currencies. (Average value of $A constant, rates for individual currencies varying day by day.)

In contrast to this system is an arrangement which has been adopted by some other countries known as a 'float', in terms of which there is no fixed link either to an individual currency, or to a 'basket'. (The average value of the currency can vary from day to day, and rates for individual currencies can also vary day by day. )

The arrangements now adopted in Australia retain the principle of the link to the trade-weighted ' basket ' of currencies, but it is intended that the link will be varied from time to time as necessary, in a flexible way, but without going so far as to 'float'. Unless a deliberate decision is taken to vary the link to the 'basket', the average value of the $A will remain unchanged (but rates for individual currencies will continue to fluctuate daily).

As decisions are taken from time to time to change the value of the $A in relation to the 'basket' (as has been done today) a further factor of flexibility will enter the determination of the exchange value of the $A. The degree of variability will however be less than in the case of a 'floating' currency.

Extract from statement by Treasurer of 28 November 1976:

The Treasurer said that as well as the initial change in the exchange rate to a new level ($A1 =$US1.0174) which would give effect to the devaluation, a changed pattern of management of the exchange rate would henceforth be adopted.

The changed arrangements would comprise a variable link to a trade-weighted' basket 'of currencies.

The Australian dollar had since September 1974 remained pegged in a fixed relationship to the average of a trade-weighted 'basket' of currencies.

The pegging of the rate for lengthy periods was now discontinued; the level of the exchange rate in relation to the basket' of currencies will be kept under review, and the Government would, in effect, be adopting a flexibility administered rate, somewhat along the lines of a managed float.

When the assessment of all relevant economic factors indicated a need for movement in the level of the exchange rate, this would take place by means of more frequent and smaller shifts in the relationship of the Australian dollar to the 'basket'of currencies.

The Treasurer will be responsible for these arrangements.

The Governor of the Reserve Bank, with the Secretary of the Treasury and the Secretary of the Department of the Prime Minister and Cabinet, would comprise the group which keeps the level of the exchange rate under review.

The Treasurer said that the arrangement was an appropriate response to the changing nature of economic conditions abroad and of Australia's international trading relationships; the arrangement was designed to avoid the building-up for the future of expectations of major shifts at long intervals in the exchange rate.

The changed system would permit the use of the exchange rate, by means of changes upwards or downwards in the rate as appropriate, as a more flexible element amongst the available arms of economic policy. '

Reserve Bank of Australia SYDNEY 7 December 1976



Mr LYNCH - As for the details of the change itself, I should have thought that they would be understood by the honourable gentleman, if he has regard for what was said last Sunday evening. However, I will seek to explain it to him and I will take a little time, having regard for the nature of the question. Hitherto, management of the exchange rate has been directed to maintaining for lengthy periods a fixed relationship between the Australian dollar and the trade weighted basket of currencies. Under this regime the rate for the dollar tended to vary from day to day against individual currencies, including the United States dollar but it took no account of developments in our balance of payments, nor in the domestic economy nor, specifically, of economic factors. Under the new pattern of management of the exchange rate, a trade weighted average rate will continue to be computed daily on the same basis as previously. However, the exchange rate will no longer necessarily be pegged, on a fixed relationship to the basket of currencies. Instead, as the Government has made clear, it will be kept under review and varied, as appropriate, in the overall context of management of the economy with emphasis upon economic factors.

This new pattern of management of the exchange rate will enable more frequent, more timely and smaller adjustments to be made to the rate. It is appropriate to the changing nature of the world economy and to Australia's international trade relationships. It is designed to avoid a build-up in expectations of major changes at longer intervals in the rate. It will permit the use of the exchange rate, as appropriate, as a more flexible arm of policy and, of course, will require little or no institutional changes. It is a further step in the development of the Australian foreign exchange system. A close watch will, of course, be maintained on the manner in which affairs develop from this point. I should say in explanation to the House that the management committee, which consists of the Governor of the Reserve Bank, the Secretary to the Treasury and the permanent head of the Department of Prime Minister and Cabinet met in Sydney on this matter on Monday morning. The Governor of the Reserve Bank reported to me the recommendation of that committee yesterday afternoon and the recommendation put by the committee was adopted by the Government. This led to the statement this morning of the Governor of the Reserve Bank.

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