Australian Dollar Article Analysis - Example

Name: Professor: Course: Date: Australian Dollars A. MAIN ISSUES DISCUSSED IN THE ARTICLE The first main issue discussed in the article “Australian dollar's next stop? US65¢ predicted as commodity prices decline” is the price of commodities. The Australian financial review shows that the fall in the prices of various commodities has led to several impacts. Such effects include closing down forcefully the currencies of resources and weakening of the dollar. The second issue discussed is the economy. The economy of Australia has been compared to the economy of New Zealand and Canada. In this comparison, the value or strength of the dollar is the major point of comparison. The third issue that the article discusses is the Australian dollar. The comparison has been made on the current value of the Dollar and the anticipated value shortly. The article clearly indicates that there is a fall in the value of the Australian dollar. This fall is like to affect the country’s interest rates and employment. Such decline in the dollar will lead to the fall in the global business competitiveness. Finally, the article compares the interest rates in Australia with that of USA and United Kingdom (Powell 2015). B. HOW AUD IS DETERMINED IN THE FOREX MARKET The exchange rate refers to the value of one currency expressed in terms of another currency. The Australian dollar (AUD) is called the bilateral exchange rate against the US dollar in theForex market. The demand and supply model of exchange rate enable the prediction of the next or future exchange rate. The exchange rate being predicted therefore is expected in the forex market. The demand and supply model, therefore, guides us on whether the exchange rate will depreciate or appreciate in the market (Chen and Rogoff, 2003 p.135). To determine the Australian dollar in the forex market, we must plot a graph of price against quantity. This is the graph of demand and supply. When the supply of a commodity is low, the demand increases. This leads to a rise in the value of the Australian dollar. When the supply is high, demand falls leading to the weakening of the Australian dollar. The demand-supply model can therefore determine the value of the Australian dollar under a floating exchange rate. The demand curve and the supply curve are therefore drawn basing on the forex markets. At the equilibrium price, the customer and the supplier are satisfied with the quantity and the price. Changes in the demand and the supply are therefore used to predict or determine the exchange rate in the forex market. FACTORS INFLUENCE ITS FLUCTUATIONS 1. The rate of inflation The rate of inflation affects the demand and supply. When the rate of inflation is high, the Australian value losses value in the forex market. When the inflation rate is low, the Australian value is stronger in the forex market. The inflation rate, therefore, affects the fluctuations in the exchange rates. 2. The growth rate The growth rate of Australia affects its dollar. When the growth rate is low, the dollar weakens in the forex market. However, when the growth rate is high, the dollar is of great value in the forex market. 3. The interest rate The interest rate of the nation also affects the exchange rates. When the exchange rates are higher, it leads to greater fluctuations in the value of the Australian dollar. 4. The government restrictions Government restrictions such as taxes and trade policies significantly affect the exchange rates. Too much restriction by the government poses massive expenses to the investors. This translates to higher fluctuations in the forex market (Chen and Rogoff, 2003 p.138). C. MOVEMENT OF AUD RELATIVE TO THAT OF THE US DOLLAR The table below shows the comparison of the Australian dollar relative to that of US dollar: Dollar Australian dollar Canadian dollar British pound New Zealand pound Percentage -9.29 -10.37 +3.48 -16.29 Deviation from 0 Around -10 Slightly above -10 Slightly above 3 Slightly above -15 Starting on the January 15th, the Australian dollar declines gradually from 0 toward negative. The month of February, the Australian dollar is slightly constant at -5%. At the month of March the dollar declines towards -6%. The month of April shows a gradual improvement in the value of the Australian dollar about the US dollar. AUD improves towards 0. The months of May, June and July depicts a severe drop in the Australian dollar. The dollar moves from around 0 to -10%. This is the greatest decline illustrated in the graph. At this period of fall, there is a general decrease in the price of commodities experienced worldwide. The decrease in the Australian dollar is therefore somehow in line with the global price movement. During this period, the Canadian dollar is at -10.37% while the New Zealand is at -16.29%. The variations in comparison with the US dollar are therefore slight. Several factors are contributing to the behavior of the Australian dollar. One paramount factor is the rate of inflation. The rate of inflation is compared to other trading partners in the world. For this case US, New Zealand, Canada and Britain has been used to make the comparison. The exchange rate between two nations typically changes to adapt to the purchasing power of both. The Australian dollar, therefore, behaves in a manner about the trading partners. The terms of trade also play a role in determining the behavior of the Australian dollar. The rise in the terms of trade increases the income of the country. This is possible due to increasing in the prices of the commodity. The increase in the domestic interest rates also influences the behavior of the Australian dollar. The value of the dollar has to change to adapt to the changes. Such changes lead to the variations that are shown in the graph (Brooks at el, 2013). D. THE FALL OF AUD AS LOW AS US 65C BY THE END OF 2016 Rose Powell’s (2015), financial review article states that “Major fund manager BlackRock is forecasting a continued slide to US70¢ by the end of the year. Capital Economics went further, anticipating an even faster fall to US65¢ by the end of 2016”. The report clearly indicates the possibility of the fall of the Austrian dollar. The financial analysts consulted have conducted various research and studies about the falling of the AUD. The comparative percentage done about the US dollar also shows the possibility of the fall. With all these information at hand, I also think that the AUD will fall to US65¢ by the end of 2016 at the end of 2016. Financial analysts rarely fail in their predictions. This is because they are experienced in the financial sector and do various researches. This adds more believe that the AUD will fall at the end of 2016 (Powell, 2015). Several advantages will be associated with the fall of the Australian dollar. The first advantage is that it will be a relief to the exporters. The weak dollar will lead to increasing in the exportation of goods and services in the nation. The second advantage is that the US dollar strength will be a rescue of the economy. The Australian economy will benefit since the economy will rise. Previously the economy of the nation has been in a very unappealing state (Cassidy at el, 2008). The fall is also good news especially to the farm and food exports. Calculations on the national farmers Federation reveal that net for every 1% depreciation leads to a rise in the agricultural sector. It is shown that the said reduction leads to an increase of $220 million in the area. The fall in the Australian dollar, therefore, boosts the agricultural sector. It is believed that the fall also promote the dairy sector. E. RESERVE BANK OF AUSTRALIA The volatility of the exchange rates in the market attracted the intervention of the Reserve Bank. These changes get some markets unaware leading to devastating effects. Most of the participants in the market are not equipped enough to counter this kind of volatility. The reserve bank, therefore, came in handy to harmonize this instability. This leads to the reduction of the effects on the economy of the country. To maintain the exchange rate at US 70C, the Reserve Bank of Australia has to take some actions. The first action expected is to create demand for the Australian dollar by buying it against other currency. The bank can also create a supply of the Australian dollar by selling it against other dollars in the market. The above is possible because the bank as the capacity to deal with forex markets and all time zones in the world. The bank has been forced overtime to trade in the forex market with its name to be recognized. The bank can also take actions through the electronic broker markets. They place bids or offers in the forex market or on individual cases transact immediately. These actions will send a stronger message to the participant in the forex market. The actions taken by the Reserve Bank of Australia might lead to adverse effects on the economy of Australia. The first imperative effect is the change in the exchange rate. The intervention of the Reserve Bank of Australia to maintain the value of the dollar leads to variation in the exchange rate. Change in the exchange rates significantly affects the forex market. This will translate to a fall in the economy (Cassidy at el, 2008). The actions of the Reserve Bank of Australia will lead to market disorder. The market disorder is a situation whereby the volatility is too much and excessive. In such situations, the bank handles the misalignment of the exchange rate. When the market functioning is in disorder, the business is not conducive. Foreign investors and the local investors cannot easily settle in the markets. This leads to the withdrawing of the investments for the fear of the unknown in the future. Markets that are not stable attract investors. When the investors flee or cannot invest the economy of the nation is at cross roads. The economy begins to fall, and this affects all the sectors. Sectors such as agriculture, mining and business will be adversely beaffected. Importation and exportation of goods and services will not escape the adverse effects. All these combination of factors greatly will have an impact on the economy of Australia. Three reasons make it difficult to quantify the effectiveness of these actions. First of all, the Reserve Bank of Australia frequently these activities when the exchange rate is moving inversely to the expected. As for this case, maintain the exchange rate at US 70C while the current is at 65C and keeps falling is difficult. The second reason is that it may not be very appropriate to measure the effect by only using the exchange rate movement in the market. Finally, there is a lack of genuine data to prove if the actions will be effective or has been effective in the past. From the previous researches done, such actions will rarely be sufficient. Most of the participants in the forex market are well equipped to cope up with the market changes. Intervention by banks such as the Reserve Bank of Australia will, therefore, yield minimal effectiveness. Reference Chen Y and K Rogoff .2003.‘Commodity currencies’, Journal of International Economics, vol. 60(1), pp 133–160. Reserve Bank of Australia.2015. Retrieved September 22, 2015, from http://www.rba.gov.au/mkt-operations/ex-rate-rba-role-fx-mkt.html Supply and Demand in Currency Trading. 2015. Retrieved September 22, 2015, from http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-rates-supply-and-demand/supply-and-demand/ Brooks M, C Deans, P Wallis, B Watson and M Wyrzykowski,.2013. ‘Developments in Foreign Exchange and OTC Derivatives Markets,' RBA Bulletin, December. Cassidy N, K Clifton, M Plumb and B Robertson.2008. ‘The Australian Foreign Exchange and Derivatives Markets’, RBA Bulletin, January. Powell R. Australian dollar's next stop? US65¢ predicted as commodity .2015. Retrieved from http://www.smh.com.au/business/markets/currencies/australian-dollars-next-stop-us65-predicted-as-commodity-prices-decline-20150717-gieiuk.html Read More