Effects of Exchange Rate on Financial Assets Prices and Macroeconomic Fundamentals

Topics: Inflation, Bretton Woods system, Foreign exchange market Pages: 6 (1735 words) Published: October 11, 2012
Exchange rate refers to the price of one currency in terms another (Fourie and Burger, 2009) for example $US 1= R 7,81. Financial assets price is the value of commodities such as oil, gold and platinum. In addition, macroeconomic fundamentals refer the macroeconomic objectives always pursued by the government to control and stabilise the economy for instance they include employment and inflation among others. The essay is going to give a discourse expounding the casual relationship between the exchange rate and financial assets prices and the macroeconomic fundamentals. 1a) FINANCIAL ASSETS PRICES

i) Commodity (oil, gold and platinum) prices
Commodity prices are determined or influenced by the volatility of the exchange rate. In South Africa oil is an import commodity while gold and platinum are export commodities. If the rand appreciates or revalued this stimulate the currency` s purchasing power against other currencies therefore making the price of oil ( import commodity) cheap while the price of gold and platinum (export commodities) increases and make it expensive in the foreign market. On the other hand, in the case of a depreciation or devaluation the price of oil (import commodity) increases while those ones of platinum and gold (export commodities) decrease in the foreign market thereby increase its demand.

In addition, there seem to be a contrary relationship between the external value of the rand and the price oil and at the same time a positive relationship is seen between the exchange rate and gold and platinum. These relationships tend to inflict positive and negative effects on the economy if not well stabilised.

ii) Local and foreign stock prices.
Considering the Johannesburg Stock Exchange (JSE) market if the South African rand depreciates or loses value against other currencies, the price for local stock tends decrease and becomes inexpensive to holders of foreign currency for example US dollar. In this regard foreign stock prices become relatively expensive as one would need more of the South African rand to purchase these shares on the stock market. On the contrary, in the case of an appreciation or revaluation local stock prices increase whereas foreign stock prices decrease as one would need few Rands to buy these stocks.

iii) Bond prices
Bond refers to a promise to pay a specified amount at a specified future date (Fourie and Burger, 2009). If the price of bonds decrease influenced by interest rate this tends to appreciate the external value of the Rand as investors would want to keep their wealth in monetary form. As the price of bonds take a surge this forces the exchange rate to decrease as more and more people would find it safe to invest in bonds rather than holding money in the form of hoard.

The relationship between bond prices and exchange rate is an indirect one as the two opposes each other. The association of the exchange rate and bond prices affect both locally and foreign investors. In this respect, when the rand appreciates foreign investors find it difficult to acquire local wealth in the form of bonds.

iv) Housing prices
The exchange rate and housing prices association is highly influenced by the movements in the exchange rate. In this regard, when exchange rate increases housing prices tend to fall as this makes the price cheap to buy. This is because of the currency that would have gain more value. Conversely, as the exchange collapses the currency loses the value therefore make the housing prices expensive as one would require more money to acquire a house in the domestic housing market.

i. Trade ( exports and imports)
The balance of trade between exports and imports induces the demand of Rand aimed at real trade transactions. A surge in trade surplus will raise the demand of Rand by foreigner this leads to the appreciation of the rand. On the other hand, while negative balance in trade will...

Bibliography: Appleyard at etal.., (2010) International Economics, 7th ed. Singapore, Mcgraw-Hill education
Fourie FC, & Burger P, (2009), How think and reason in Macroeconomics, 3rd edition, Cape Town, Juta & Co Ltd.
Investopedia, (2010), 6 Factors That Influence Exchange Rates, accessed on www.investopedia.ac/exchange rate/ 26-09-11.
About.com.Economics, (2011). Exchange rates and Commodity prices.accessed on www.about.com.economics./ 26-09-11
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