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Balance of Payments (BOP)

The Australian dollar has reached parity with the US dollar for the first time since

the currency was floated in December 1983 (Heraldsun, 2010). It’s believed that in the

long term, increasing trend may reduce the competitiveness and therefore causes a

drop in demand for Australian exports to foreign markets. This is likely to worsen the

current account deficit and eventually cause the AUD to depreciatev(Kritzer, 2010). This

situation can be explained clearly by the J-curve theory. An appreciation could lead to

higher levels of capital outflow from Australia as Australian assets now become more

expensive and less attractive relative to goods and services produced overseas. Thus,

foreign equity investment decreased in Australia (Eiteman et al., 2007, p.113).

Besides, a large proportion of Australian exports comprise of mining commodities.

According to the Australian Department of Foreign Affairs and Trade (2009), China

appeared to be the top trading partner of the nation, the upward value of AUD has been

helped by Chinese demand for its natural resources; hence, Australia is subjected to be

more vulnerable to external shocks such as downturn in the Chinese economy (Kritzer,

2010). Furthermore, Australia is also exposed to large fluctuations in commodity prices,

which considerably influences export earnings, leading to increased volatility in the

current account deficit. All these surrounding uncertainties have catalysed a spike in

volatility, and it could compel a depreciation of AUD in a nearer future (Ravimohan,