Trade Weighted Index
Economics (Year 12) - Exchange Rate
What is the traded weighted index (TWI)?
The trade-weighted index (TWI) is a measure of the price of the Australian dollar to the price of a basket of currencies, weighted according to the importance of trade flows with Australia. The TWI is used to provide a more reliable indicator of the price of the Australian dollar than the typical AUD to the USD exchange rate.
For example, while the AUD might depreciate against the dollar, it may also appreciate against the Yuan, Yen or Euro, providing confusion over whether the real price of the currency is being appreciated or depreciated.
What are the Weights of the TWI?
Data Source: Reserve Bank of Australia, Traded Weight Index as at 7 July 2022.
The RBA sets the weights for the traded weighted index which are changed once a year. The top 10 weights are provided in the image above. Notice how movements in the US Dollar only account for 10.3% of the traded weighted index despite how commonly it is referenced in the world of finance. As expected with our trade volume, the TWI places more importance on the value of the Chinese Renminbi (or Yuan).