Amid growing concerns about exchange rate instability and its disruptive effects on global trade, this paper examines the effects of exchange rate volatility on international trade, with a specific focus on the AUD/USD currency pair and ChinaAustralia trade flows. Exchange rate fluctua- tions introduce uncertainty into cross-border transactions, affecting pricing decisions, supply chain contracts, and hedging costs. This paper focuses on the impact of exchange rate volatility on trade volumes by estimating the time - varying volatility of the AUD/USD rate using GARCH models and applying regression analysis at both aggregate and sectoral levels. The findings show that a 10% increase in exchange rate volatility is associated with a 2.3% reduction in exports and that imports are 1.8 times more sensitive to such volatility. Sectoral analysis reveals that manufactured goods are most vulnerable, followed by mineral resources, agriculture, and energy. The regression model demonstrates a high explanatory power with an adjusted R2of 0.82. These results highlight the critical role of exchange rate stability in fostering robust trade rela- tions and provide essential insights for policymakers and firms involved in global trade.
K. H. Wang (Wed,) studied this question.