When the exchange rate is moving in line with the terms of trade, the real fundamentals, it plays the appropriate macro stabilisation role. Farhi and Werning have that explicitly in their model. In Australia’s case, over the 30 years of the float, the exchange rate has done just that most of the time.
While national authorities will continue to be responsible for the exchange rate of their respective currencies up to this deadline, the May agreement should have a decisive influence and should diminish the possibility of considerable fluctuations. There has been substantial convergence of interest rates in Europe in recent months.