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Introduction to Exchange Rates
• The exchange rate is the price of a nation’s currency in terms of another currency
• There are about 180 legal currencies in the world • We will define exchange rate as “The price of U.S. dollar expressed in terms of foreign currency” For Example, 1 U.S. dollar = 0.92 Euros, 1 U.S. dollar = 0.66 British Pounds 1 U.S. dollar = 119 Japanese Yen…
Broad Dollar Index : Trade-Weighted Effective Exchange Rate
Construction of Broad Dollar Index
• Weight of each country = bilateral trade in all goods with the U.S. (both imports and exports) divided by total U.S. trade
• Sum of these weights are equal to one
• Real exchange rate index = Nominal exchange rate index *(the
CPI of U.S. / the CPI of a specific country)
• Broad Dollar Index is the weighted average of real exchange rates
Wine Economics of a Strong Dollar
• Imports become relatively cheap in the U.S. market
• U.S. produced wine becomes relatively expensive in the export market
• U.S. wine exports become expensive relative to wine from other source countries in export destinations
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4,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Dollars per Ton
Tota
l Gra
pes C
rush
ed, 1
,000
Ton
s
Total Grapes Crushed in Districts 12,13, and14 Weighted Average Grower Return
0
0.5
1
1.5
2
2.5
3
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
Bulk Export Unit Prices Bulk Import Unit Prices
Monthly Bulk Wine Import and Export Unit Prices, Jan 2005 – Feb 2015
05
10152025303540
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
Bulk Wine Imports in Million Liters Bulk Wine Exports in Million Liters
Monthly U.S. Bulk Wine Imports and Exports in Million Litters, Jan 2005 – Feb 2015
Importance of Exchange Rates for Imported Wine
• Both bottled and bulk wine are imported from the same set of countries: Australia, Argentina, Chile, South Africa, Euro Zone countries, New Zealand
• However, the import shares vary, thus the importance of each individual exchange rate varies by bulk and bottled imports
• When the dollar strengthens what happens??
708090
100110120130140150
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
AUS$/US$ New Zealand $/US$
Monthly Real Exchange Rate Indices of Australian and New Zealand Dollar to U.S. Dollar, Ave. 2010 = 100
2014 Australian average share of U.S. bulk imports 19%, share of bottled imports 14% 2014 New Zealand average share of U.S. bulk imports 29 %, share of bottled imports 5%
Monthly Real Exchange Rate Index of Euro to U.S. Dollar, Ave. 2010 = 100
2014 Euro Zone average share of U.S. bulk imports 10%, share of bottled imports 64%
80859095
100105110115120
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
Monthly Real Exchange Rate Indices of Chilean and Argentine Peso to U.S. Dollar, Ave. 2010 = 100
2014 Chile average share of U.S. bulk imports 27%, share of bottled imports 8% 2014 Argentina average share of U.S. bulk imports 14 %, share of bottled imports 8%
8090
100110120130140150
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
Chilean Peso / US$ Argentine Peso / US$
Bulk Wine Import Weighted Exchange Rate Index
80
90
100
110
120
130Ja
n-05
May
-05
Sep-
05Ja
n-06
May
-06
Sep-
06Ja
n-07
May
-07
Sep-
07Ja
n-08
May
-08
Sep-
08Ja
n-09
May
-09
Sep-
09Ja
n-10
May
-10
Sep-
10Ja
n-11
May
-11
Sep-
11Ja
n-12
May
-12
Sep-
12Ja
n-13
May
-13
Sep-
13Ja
n-14
May
-14
Sep-
14Ja
n-15
Ave. 2010 = 100 for all exchange rates and 2014 average import shares used
Bottled Wine Import Weighted Exchange Rate Index
Ave. 2010 = 100 for all exchange rates and 2014 average import shares used
80
90
100
110
120
130
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
Importance of Exchange Rates for California Wine Exports
• Major Export Destinations : Canada, United Kingdom, Euro Zone (Germany), Japan, China, and Hong Kong
• However, the export shares vary, thus the importance of each
individual exchange rate varies by bulk and bottled exports
• When the dollar strengthens what happens??
Monthly Real Exchange Rate Indices of Euro and British Pound to U.S. Dollar, Ave. 2010 = 100
2014 Euro Zone average share of U.S. bulk exports 34%, share of bottled exports 12% 2014 British average share of U.S. bulk exports 32%, share of bottled exports 13%
708090
100110120130
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
EUR/US$ Pound/US$
Monthly Real Exchange Rate Indices of Canadian Dollar and Japanese Yen to U.S. Dollar, Ave. 2010 = 100
2014 Japanese average share of U.S. bulk exports 7%, share of bottled exports 9% 2014 Canadian average share of U.S. bulk exports 7%, share of bottled exports 37%
80
90
100
110
120
130
140
150Ja
n-05
Jun-
05N
ov-0
5A
pr-0
6Se
p-06
Feb-
07Ju
l-07
Dec
-07
May
-08
Oct
-08
Mar
-09
Aug
-09
Jan-
10Ju
n-10
Nov
-10
Apr
-11
Sep-
11Fe
b-12
Jul-1
2D
ec-1
2M
ay-1
3O
ct-1
3M
ar-1
4A
ug-1
4Ja
n-15
Japanese Yen/US$ Can$/US$
Bulk Wine Export Weighted Exchange Rate Index
Average 2010 = 100 for all exchange rates and 2014 average export shares used
80
85
90
95
100
105
110
115
120Ja
n-05
May
-05
Sep-
05Ja
n-06
May
-06
Sep-
06Ja
n-07
May
-07
Sep-
07Ja
n-08
May
-08
Sep-
08Ja
n-09
May
-09
Sep-
09Ja
n-10
May
-10
Sep-
10Ja
n-11
May
-11
Sep-
11Ja
n-12
May
-12
Sep-
12Ja
n-13
May
-13
Sep-
13Ja
n-14
May
-14
Sep-
14Ja
n-15
Bottled Wine Export Weighted Exchange Rate Index
Average 2010 = 100 for all exchange rates and 2014 average export shares used
80
85
90
95
100
105
110
115
120Ja
n-05
Jun-
05N
ov-0
5A
pr-0
6Se
p-06
Feb-
07Ju
l-07
Dec
-07
May
-08
Oct
-08
Mar
-09
Aug
-09
Jan-
10Ju
n-10
Nov
-10
Apr
-11
Sep-
11Fe
b-12
Jul-1
2D
ec-1
2M
ay-1
3O
ct-1
3M
ar-1
4A
ug-1
4Ja
n-15
The Case of Australian Imports of Bulk Wine
• U.S. Dollar appreciated against Australian Dollar over 20% since 2011
• In 2014, a quarter of U.S. bulk wine imports came from Australia
• Did Australia increase exports of bulk wine into the U.S. since 2011?
Real Exchange Rate of Australian Dollar and Imports of Bulk Wine
0.80
1.00
1.20
1.40
1.60
0
2
4
6
8
10
12
14
16Ja
n-05
Jun-
05N
ov-0
5A
pr-0
6Se
p-06
Feb-
07Ju
l-07
Dec
-07
May
-08
Oct
-08
Mar
-09
Aug
-09
Jan-
10Ju
n-10
Nov
-10
Apr
-11
Sep-
11Fe
b-12
Jul-1
2D
ec-1
2M
ay-1
3O
ct-1
3M
ar-1
4A
ug-1
4Ja
n-15
AUD to USD
Mill
ion
Lite
rs
Monthly Bulk Wine Imports from Australia Average Monthly Real Exchange Rate AUD to USD
Conclusion
• Strong dollar hurts the California wine grape and wine industry three ways
• From this preliminary analysis there is no evidence that the exchange rates dominate the bulk wine trade
• There are other things that influence the wine trade: yields,
demand changes, policy (duty drawbacks)
Thank you
