The Australian Foreign Exchange Market - Coursework Example

Name: Instructor: Class/Course: Date: The latest events in the foreign Exchange markets and the Australian and International Economy Executive Summary The economic prowess of every country is basically determined by the current exchange rate with respect to other countries in the world. The currency exchange rate of a country is the rate, going by international standards, by which two currency are exchanged in the international market. In this case, the international standard exchange rate adopted displays the much that a single currency can be exchanged for another currency. Notably, the foreign exchange market becomes the largest financial market in the world and in itself controls massive amount that increases year by year. The recent analysis of the Australian foreign exchange market showed some tremendous improvement, a fact that reflect directly to the economic growth and development, going by the current market standard. The increasingly globalised economy shows the great importance of the foreign exchange in the marketplace and the average consumer. Economically, the rate at which the local currency of a country, say Australia for example, is exchange in the international forex market reflects the price and demand of different products and services in the local market, the rate of return on investments, as well as the interest rate controlled by the national banks reserves. Considering the macroeconomic issues attached to this case, this journal analysis some of the latest events that have occurred in the foreign exchange markets, especially in Australian market and the state of the international economy. Discussion The exchange rate system revolves around the nation’s monetary framework and the major participants of the exchange rate market include commercial banks, central banks, and other financial institutions. According to recent Australian financial reports, the domestic data in reality has by far performed better than the expectations in the past few months, in terms of the retail sales growth as well as the international trade that made better than expected growth in the recent period. Among all the adjustments made in the Australian monetary system, the Reserve Bank of Australia, as reported by many financial reports such as FX Alerts of January 6th of 2014, showed an effective easing signal in its financial cycle. Based on the onset of the growth pattern of the Australian Dollar {AUD}, it is expected to maintain its position in the short run having gained against the USD. The first quarter of 2014 {Q1-2014} made a paramount forecast of 0.91 to 0.87. The table below shows the short and medium term projections for the 2014. Table 1: FX-Alert-Australian dollar material changes FX Change period prior new Australian dollar 3MFX rating NA UNDERWEIGHT NEUTRAL Australian dollar AUD-USD Q1-2014F 0.87 0.91 Australian dollar AUD-USD Q2-2014F 0.86 0.88 Source: Bloomberg, Standard Chartered Research Basically, the AUD-USD has recovered sharply according to the table above, considering that it was low at 0.8660 by January 24th unexpectedly and considering the expectations of increased inflation level from the monetary policy reassessment. Technically, this is viewed as an economic recess and followed the down-trend that began earlier on in October 2013 as a corrective mechanism. According to domestic data as reviewed in the financial reviews, the indicator charts of the daily-short term pace was very aggressive and shows potential to gain in the new future. In this case, and in terms of the upside targets, 0.9284 is major trend-line resistance off the 1.0582 and 0.9758 highs. However, before that, there was a 0.9086-resistance, which was higher that that of the January 13th. It is also evidenced from the weekly chart that the AUD-USD is likely to see further gains. That said, 0.9079/86 may be a tough obstacle in the near term, and it seems reasonable to expect consolidation in this context. In the very big picture, however, 0.9145 and 0.9885 are vital resistance levels (38.2% and 23.6% of 0.6009-1.1081, respectively). In the absence of the latter breaking, the medium-term targets remain 0.8548 (50%) and 0.7950 (61.8%). The sharp improvement on the domestic data is as shown in the graph below. Figure 1: Domestic data has improved recently Australia economic surprise index, 1-month moving average 80 60 40 20 Surprise index 0 -20 1 month moving -40 average -60 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Source: Bloomberg, City, Standard Chartered Research One of the macroeconomic tests of growth is the measure of inflation rate in the economy. According to the latest developments, the demand-based inflation was 2.7% y/y, a percentage that was unexpectedly higher that the expected 2.4% market inflation rate. An averaged inflation rate was also higher in the market at 2.6% against the expected 2.3%. These differences in the real and expected inflation rates were as a result of higher food expenses as well as recreational expenses that surprisingly increased when the number of the tourists increased. It is expected however, that the increase in inflation would be temporal since food is considerately the highest contributor of the consumer price indices (CPI) and therefore the increase in food prices may be influenced by the wave of the demand moment that is expected to cool down. Other non tradable components of inflation rose by 0.7% q/q (1.0% y/y), basically as a result of the depreciation of the AUD. According to the economic forecasts and expectations, the reduced wage inflation will have a massive limiting impact on the inflationary pressure as experienced from the depreciation of the AUD in the future. Figure 2: Inflation has risen more than expected % 6 Food Housing Transportation Others 5 CPI - trimmed CPI inflation mean inflation 4 3 2 1 0 -1 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: ABS, Standard Chartered Research In the 19th match of 2014, the U.S. Federal Reserve strategically dropped its 6.5% unemployment threshold and made avenues for wider range of measures in determining the level of interest rate. Notably, the increased $10 billion reduction in its monthly bond purchases was accompanied with US Federal Reserve increasing the interest rates by 0.25%. From economic perspective, the base interest rate of the central bank normally has great monetary effects and conversely on the interest rates charged commercial banks, exchange rates, as well as the inflation rate at a particular financial duration. When the base interest rate is reduced, an alternate macroeconomic reaction occurs in the economy in the sense that business activities (and investments) will increase, raising the level of inflation rate. The rise in inflation would lead to reduced exchange rate and thus weaker national currency. The reverse is true for macroeconomic course and reactions in the monetary system. Consider the U.S. Federal funds target before the increment of the interest rate by 0.25% as shown below. The recent economic reviews by the parliamentary business {Parliament t of Australia} dated January 26th of 2014, states that the recent economic developments have been very consistent and in respect to the mid-year economic and fiscal outlook of the country. The review, ‘Recent Economic Development’ by the Director of Macroeconomic Group of the Department of Treasury, Dr. David, asserted that the general focus is one the global economic improvement, in what seems to be a slow drawn out recovery from the financial crisis. The emerging economies are somewhat slower, while the advanced economies like China are very solid in improvement. The recent month’s sentiments of growth are encouraging according to the review, and the moderate improvement in the emerging market economies is expected to increase the bulk of global growth. Notably, the review revealed that the outlook of the MYEFO was considerately below the economic growth trend but continues to grow over the 2013-2014 and the 2014-2015. Meanwhile, the Australian economy transitions slow to broader based on non-resources sources of growth. The business community, as surveyed by the NAB shows positive gains over the last few months, a significant improvement that encourages business confidence. In the same way, the recovery signs have also been witnessed in the non-resources sectors such as housing, where the rates show significant amounts of recovery. Works cited: Amstad, Marlene, and Antoine Martin.  “Monetary Policy Implementation: Common Goals but Different Practices.” Current Issues in Economics and Finance 7(7), Federal Reserve Bank of New York. 2014. AVERSA, Associated Press Writer. ‘‘Fed Raises Key Interest Rate 0.25 point.’’ AP Online 19th Feb. 2014:4-9. International Financing Review. London, 2014. Print. Parliamentary Business. ‘‘Recent economic development.’’ Additional Estimates 2013-14 (26-27 February 2014), senate estimates, Macroeconomic Group, Department of Treasury, 2014. Walter, J. R., and Renee, H. “The Effect of Interest on Reserves on Monetary Policy.” Economic Brief EB09-12, Federal Reserve Bank of Richmond, December. 2009.  Read More