Understanding the Trade Weighted Index (TWI) of Australia

Definition of the TWI

The Australian dollar trade-weighted index (TWI) is a measure that reflects the value of the Australian dollar (AUD) in relation to a basket of foreign currencies. This basket of currencies represents the countries with which Australia engages in significant trade activities. The TWI serves as a broader indicator of the AUD’s overall strength or weakness against its major trading partners’ currencies, providing a more comprehensive assessment compared to bilateral exchange rates.

Composition of the TWI

The TWI comprises a group of 17 foreign currencies, with their respective weights determined based on Australia’s merchandise goods and services trade composition during the 2022/23 financial year. The currencies included in the TWI are:

• Chinese renminbi (CNY)
• Japanese yen (JPY)
• European euro (EUR)
• United States dollar (USD)
• South Korean won (KRW)
• Singapore dollar (SGD)
• Indian rupee (INR)
• New Taiwan dollar (TWD)
• Malaysian ringgit (MYR)
• New Zealand dollar (NZD)
• Thai baht (THB)
• United Kingdom pound sterling (GBP)
• Vietnamese dong (VND)
• Indonesian rupiah (IDR)
• Hong Kong dollar (HKD)
• Canadian dollar (CAD)
• Philippine peso (PHP)

Currency Weights in the TWI

The weights assigned to each currency in the TWI are subject to periodic adjustments. As of December 2023, the Chinese renminbi holds the largest weight, followed by the Japanese yen and the European euro. These weights reflect the relative importance of these countries in Australia’s trade activities.

Changes in Currency Weights

Fluctuations in individual currency weights within the TWI are typically within a range of +/- 1.25 percentage points. These adjustments are made to ensure that the TWI accurately reflects the evolving trade patterns and economic relationships between Australia and its trading partners.

Significance of the TWI

The TWI plays a crucial role in assessing the overall strength or weakness of the Australian dollar against a diverse group of currencies. It provides a more comprehensive view of the AUD’s performance compared to focusing solely on bilateral exchange rates. This broader perspective is particularly valuable for businesses engaged in international trade, as it helps them understand how the AUD’s value is faring against the currencies of their key trading partners.

References

1. Reserve Bank of Australia: https://www.rba.gov.au/statistics/frequency/weights-twi.html
2. IBISWorld: https://www.ibisworld.com/au/bed/trade-weighted-index/89/
3. Parliament of Australia: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/MSB/feature/EXCHANGE

FAQs

What is the trade weighted index (TWI) Australia?

The TWI is a measure that reflects the value of the Australian dollar (AUD) in relation to a basket of foreign currencies, representing countries with significant trade activities with Australia. It provides a broader assessment of the AUD’s strength or weakness against its major trading partners’ currencies.

How is the TWI calculated?

The TWI is calculated based on a weighted average of the AUD’s exchange rates against the currencies included in the basket. The weights are determined by the relative importance of each currency in Australia’s merchandise goods and services trade.

What currencies are included in the TWI basket?

The TWI basket currently comprises 17 foreign currencies, including the Chinese renminbi (CNY), Japanese yen (JPY), European euro (EUR), United States dollar (USD), and others. The composition of the basket is reviewed periodically to reflect changes in Australia’s trade patterns.

Why is the TWI important?

The TWI is a valuable tool for businesses engaged in international trade, as it provides a comprehensive view of the AUD’s performance against the currencies of their key trading partners. It helps them understand how the AUD’s value is faring and make informed decisions regarding currency risk management and pricing strategies.

How often is the TWI updated?

The TWI is calculated and published on a daily basis, providing real-time information on the AUD’s value relative to the currencies in the basket. This allows businesses and market participants to monitor currency movements and adjust their strategies accordingly.

What factors influence the TWI?

The TWI can be influenced by various economic and market factors, including changes in interest rates, inflation, economic growth prospects, political developments, and global market sentiment. These factors can impact the demand for the AUD and its value against other currencies.

How can businesses use the TWI?

Businesses involved in international trade can utilize the TWI to:

• Assess the overall strength or weakness of the AUD against a diverse group of currencies.
• Identify potential currency risks and opportunities associated with their international transactions.
• Make informed decisions regarding currency hedging strategies to mitigate foreign exchange risks.
• Monitor the impact of currency fluctuations on their profit margins and overall financial performance.

Where can I find the latest TWI data?

The latest TWI data is typically published on the websites of central banks, financial institutions, and economic data providers. Additionally, many financial news outlets and platforms provide real-time updates and analysis of the TWI.