Rush to Swap Aussie Dollars - Assignment Example

Rush to Swap Aussie Dollars A brief summary of Collett’s (2014) article The article by Collett (2014) describes how Australians are rushing to swap their Australian dollars with other hard currencies. In the article, it is clear that at the time Collett (2014) wrote the analysis, the Australian dollar (AUD) was not inspiring much confidence among its users, hence the rush to trade it in exchange for other relatively stable currencies. The article indicates that the rush in the cited year (2014) was a departure from the tradition, where the demand for other hard currencies would be witnessed as time drew closer to the holiday seasons. In 2014, however, it would appear that people were willing to swap their Australian dollars earlier than usual because they were not too certain whether the AUD would be stronger or weaker against other major currencies. Peoples’ willingness to trade their AUDs at prevailing market rates at the time was an indication that they did not have the conviction that the AUD would eventually regain its foothold against the American dollar, the euro and even the Japanese yen. A great percentage of the article is dedicated to explaining how people are securing their money’s worth by swapping AUD and into other hard currencies and locking the exchange rates. Reading the article, one gets the impression that by locking the exchange rate, consumers have the perception that AUD’s value will be eroded further, hence the urge to protect their money’s worth. The article also cites relative interest rates as one of the factors that could be occasioning the weak AUD. The writer argues that the interest rates in Australia may remain low since the country’s economic growth is modest, which is not the case with other comparable countries. Despite the rush to swap the AUD for other hard currencies, the article creates the impression that the currency would hold steady until the end of 2014. Future forecasts by analysts featured by Collett (2014) indicate that the AUD would fall against the British pound and the American dollar. Overall, the article describes how people (consumers) behave in times of uncertainty. Notably, consumers do what they perceive as capable of serving their interests best. From the article, one also gets the impression that no one knows for sure how currencies will perform in future. With uncertainty looming, it is only natural that Aussies swapped their AUDs as they did. AUD’s movement relative to the US dollar in the past three years The AUD is usually “reported as a nominal bilateral rate” while the American dollar (USD) is reported as a “global major currency” (Garton, Goudry & Wilcox 2012, p. 2). The foregoing statement means that the USD is used as the unit of value against which the AUD is measured. The Reserve Bank of Australia (RBA) (2002) however indicates that rather than relying on the bilateral rate-global currency measurement, the effective exchange rate is a better alternative of weighting the two currencies. According to RBA (2002), effective exchange rate is mainly based on bilateral exchanges between the two countries and is therefore more suited to reflect the trade-weighted average rates of two currencies. With the exception of the 2008-2009 economic recession when the USD rates had dipped significantly against the AUD, the currency has stabilised in recent years to trade above 1 dollar in 2011 and 2012 (Exfin International Pty Ltd 2014). The above 1 dollar trend continued in 2012, but dipped significantly in 2013, whereby, by May 2013, the USD was trading at 0.9 against the AUD. In other words, the USD vs. AUD rate was above 1 dollar mark in May 2011 (1.08 to be specific), on the 1 dollar mark in May 2012, 0.9 dollars in May 2013, and 0.8 dollars in May 2014 (Exfin International Pty Ltd 2014). See graph the graph below. Figure 1: USD vs. AUD in the three years between 2011 and 2014 Statistics derived from Exfin International Pty Ltd (2014). One of the main reasons that have enabled the AUD to remain relatively stabled against the USD is that Australian interest rates have remained low when compared to the US interest rates (Garton et al. 2012). It is argued that interest rates are closely linked to a country’s monetary policy. When interest rates are high, import prices are low, and the currency appreciates. Theoretically, relatively stable interest rates (like the ones maintained by the RBA) translate into a stable currency and equally stable import prices. In real life however, interest rates are just one factor that influences the value of a currency. While the RBA has maintained interest rates at an arguably stable rate between 2011 and 2014, the USD vs. AUD exchange rate has been fluctuating. Collett’s (2014) article creates the impression that the AUD is weakening against the USD. While consumers may perceive such weakening as a bad thing, analysts in fact suggest that it is not. Positive and negative effects of a weak exchange rate for the Australian dollar A weak exchange rate for the Australian dollar generally means that the AUD would be relatively weaker to other major currencies especially the USD, the British pound, the euro and the Japanese yen. Some of the positive effects of a weak exchange rate for Australia as explained by the Sydney Morning Herald (2015) include: the relatively weaker AUD will make Australia more attractive to international tourists. This means that the tourism sector will benefit, in addition to the fact that Australia will earn more foreign exchange. Another source of foreign exchange will be the international students who because of the allure of a weaker AUD, may opt to study in Australia as opposed to other developed countries (Hutchens 2014). The second positive effect relates to making internal travel comparably affordable hence boosting the local tourism sector (Sydney Morning Herald 2015). A weaker exchange rate will also give Australian manufacturers an advantage compared to their competitors in other countries where exchange rates are stronger (Sydney Morning Herald 2015). Furthermore, the weaker exchange rate will be an advantage to exporters, who will have an enhanced competitive edge when compared to their offshore competitors. Collectively, the above positive effects will enhance Australia’s economic growth. With an improved economic growth, the Sydney Morning Herald (2015) argues that the economy will open up, something that will result to the creation of more jobs. More job opportunities will lower the unemployment rate in the country and eventually, Australians will have more disposable incomes. On the negative side however, the Sydney Morning Herald (2015) indicates that a lower exchange rate affects consumers’ purchasing power negatively. Mainly, the negative effect on consumer purchasing power is occasioned by high prices of consumer items. Another negative effect will be felt by importers since the cost of imports will go higher. In other words, importers will be spending more AUDs to purchase and import goods, and this means they will either raise their prices and hence place the burden of higher prices on consumers, or settle for lesser profit margins. Actions that the Reserve Bank can take to restore the exchange rate The RBA, through the Reserve Bank Act 1959 has three main objectives. The first objective is to enhance the stability of the AUD. Other objectives include maintaining optimal employment rates in the country and enhancing the “economic prosperity and welfare of the people of Australia” (RBA 2015a, para. 6). Arguably, the RBA cannot take actions to restore the exchange rate unless it threatens the stability of the AUD, compromises the economy’s ability to provide optimal employment, and puts in jeopardy the welfare and prosperity of the people and economy of Australia respectively. As indicated in question three above, the weak AUD can possibly lead to more employment opportunities. Additionally, Manalo, Perera and Rees (2014) argue that the current rates are enhancing economic growth and are more stable than was the case when the AUD was competing for superiority with the USD. In this scenario, therefore, the Reserve Bank does not have to act. However, it is important to note that if the three objectives were at risk of not being met, the Reserve Bank would be entitled to act. The main intervention action that RBA takes is “create demand or supply for the Australian dollar by buying or selling Australian dollars against another currency” (RBA 2015b, para. 33). However, the bank admits that the results of its intervention measures have never been accurately determined because of three main challenges – I) no one has been able to determine what the absence of an RBA intervention would have led to; II) simple metrics such as the “daily exchange rate movements” cannot be fully relied upon to measure the success (or the lack thereof) of an RBA intervention; III) there is no adequate data to identify whether indeed RBA interventions are effective (RBA 2015b, para. 35). The RBA could also use fiscal policy interventions to adjust taxation or government spending in which case the monetary policy would be tightened leading to an appreciation of the AUD. Consequently, inflationary pressures would decrease (Garton et al. 2012). Using fiscal policy interventions to enhance the AUD’s exchange rate would however reverse some of the gains mentioned in question 3 above. While consumer goods would be cheaper, there is a possibility that job creation would be much slower. Additionally, the stronger AUD would mean that people (e.g. tourists and international students) prefer other countries to Australia. Finally, there is also a possibility that such interventions would reverse the gains made by manufacturers and exporters. Arguably, the weaker AUD is good for the Australian economy, and as long as the currency is stable, does not affect employment negatively, and does not jeopardise the economy and welfare of Australians, not much intervention is required from the RBA. References Collett, J 2014, ‘Rush to swap Aussie dollars’, The Age, viewed 10 March 2015, . Exfin International Pty Ltd 2014, ‘Forex charts: AUD vs mahor currencies: 20 years’, viewed 10 March 2015, . Garton, P., Gaudry, D & Wilcox, R2012, ‘Understanding the appreciation of the Australian dollar and its policy implications’, Treasury, viewed 10 March 2015, . Hutchens, G 2014, ‘The dollar keeps falling: what’s happening to our economy?’ The Sydney Morning Herald, 12 October, viewed 10 March 2015, . Manalo, J, Perera, D & Rees, D 2014, ‘Exchange rate movements and the Australian economy’, Reserve Bank of Australia, viewed 10 March 2015, . Reserve Bank of Australia (RBA) 2015a, ‘Monetary policy’, viewed 10 March 2015, . Reserve Bank of Australia (RBA) 2015b, ‘The exchange rate and the reserve bank’s role in the foreign exchange market’, viewed 10 March 2015, . The Sydney Morning Herald 2015, ‘What does a lower Australian dollar mean for consumers?’ SMH Business Day, 9 January, viewed 10 March 2015, . Read More