Do Exchange Rates Affect the Stock Performance of Australian Banks?

Abstract

We study the impact of currency shifts on the market value of the four major Australian banks. Specifically we examine the relationship between the value of the Australian dollar against the US dollar, the Sterling Pound, and the New Zealand dollar and the PB ratios of these four banks. We find that the negative impact of a drop in the value of the banks' offshore assets in terms of US dollars and Sterling Pounds is being reflected in the stock price, but this is not the case for the New Zealand dollar. There is also a negative relationship between the level of interest rates and the PB ratios indicating that the present value of future income streams is an important issue for investors investing in bank stocks.

Keywords: Exchange Rates, Offshore Assets, Banking

JEL Classification: G12, G21