Can large Exporters drive FX changes through price changes ?
Some people are saying the exchange rate can be a function of what large exporters are doing with their prices. Not large exporters responding to the exchange rate.
ER = f(P) “exchange rate is a function of price”.
The exchange rate is a composite index of the current real terms of trade between two nations if the govt/CBs are not involved directly.
If the govt/CB delegates the exchange function to the member banks… banks have effectively fixed capital within the periods of time or frequency of price strategy changes by the producers so they have to adjust other parts of the balance sheet (other than capital) in the face of significant price changes by producers. so they will acquire or shed currency reserve assets in the face of rising or lowering prices of the inventories they are financing to maintain a constant capital – asset ratio.
So if the Japanese Auto makers increased their prices in $ terms in the US. Then USD/JPY would fall. Or if they cut their prices it would rise.
Therefore these huge exporters when they do this drives the FX market.
What is your take on this Cullen? True, possible, no way ?
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