Describe about the Fluctuation of AUD for Value of Australian Dollar.
The Main Issues Discussed in the Article
The article describes the Australian dollar value in comparison to exchange market. The country’s currency has been in a lag for almost four months since 2015. Instead of raising the dollar value keeps depreciating with U.S. dollar. The concerned players in the market are worried about AUD trend in the market.
Stronger U.S. dollar has a decreasing effect on Australian currency (Mahajan, 2013)). The value of the country’s dollar depreciates, this leads to a decrease in the prices of important commodities in the country. Key products cannot compete in the global market due to reduced exchange rate for Australian Dollar over U.S currency. The RBA is not able to rectify the trend because the market is in adjustment process due to long term experienced a decrease in prices. The intervention of RBA will only worsen the situation.
Because U.S dollar keeps on strengthening in its value, the exchange rate of Australian currency is expected to reduce even to below US 70. This is due to high US interest rates that weaken commodity prices in Australia thus increases risks level in Australia.
The Determination of AUD Using Demand and Supply Model of Exchange Rate
AUD is determined in the market using Demand and Supply model of exchange rate when Australian currency represent a price on the vertical axis while US dollar is on the horizontal axis. The forces of demand and supply in the market determines the level of currency’s demand and supply. When demand for US dollar increases, its value increases too. Thus affects Australia dollar negatively.
This represents appreciation of US dollar, hence, a decrease in the value of AUD. However, when US dollar’s demand decreases, its value depreciates, and prices of Australian products increases thus increase in the value of AUD. The market forces play a significant role apart from the intervention of monetary policy by Reserve Bank.
Market struggles through value determination to determine a point at which an equilibrium can be attained. In the process of reaching equilibrium level, various points are determined. At the points, the currency of AUD is either low or high (Cox, 2010). A lower currency illustrates a weaker value and higher represents higher money value. All the behavior of AUD is mostly affected by Central Bank of USA response. Monetary action by US market will hamper the need to stabilize at market forces.
Therefore the determination point is attained depending on the rising or falling of the value of US dollar in the market. AUD will have a higher value if the US dollar decreases.
Factors Influencing AUD Fluctuation
Inflation Rate
Inflation in the USA may be lower compared to inflation in Australia. Thus US dollar becomes more competitive than AUD (Bedeian, 2002)). This increases demand for US dollar compared to AUD. The value of US dollar appreciates while the value of AUD depreciates.
Interest Rates
If the interest rate of USA is higher than Australian interest rate, it lures more investors to invest their money in USA economy. Saving in USA banks increases the demand for US dollar thus increase in its value.
Speculation
If there is speculation that AUD will rise shortly, more people will demand it. This leads to value appreciation.
Relative Strength of AUD
If the power of AUD is relatively high than US dollar it will gain more demand and as well appreciates in value. Otherwise, it will depreciate due to demand decrease.
Unstable Competitiveness
In case commodities from the USA gained more attraction compared to Australian goods there will be an increase in exchange rate. Xchange in exchange rate appreciates US dollar thus depreciates AUD.
The AUD has been having unpredicted trend for the past three years of comparison. It keeps on fluctuating about US dollar. As US dollar maintains its stability, AUD of Australia fails to attain the strength over US Dollar thus its trend in the market is a fluctuating style. AUD is depreciating more often due to appreciation in value of US dollar. The appreciation weakens the AUD stability in the market by becoming weak in the exchange rate (Downes, Hanslow, & Tulip, 2014).
As US dollar increases, AUD decreases. However, it has a point at which it neither hits most high or least low. US dollar is stable, it improves prices of its products and services, and creates more pressure on AUD. Therefore, it becomes weaker in the exchange market by showing a weaker exchange rate. Apart from the discussed situations, the following factors affects the trend observed with AUD;
The world financial crisis that affects US dollar had an effect on AUD. US dollar being a trade currency for Australia, get influenced by fluctuations of US dollar. Thus made AUD also to fluctuate.
Terms of Trade
Terms of trade are achieved due to the difference in prices of imports and exports. The country’s expenditure on imports sometimes higher than the exports earning, thus creating a low balance of trade to the country hence weakening AUD (Svensson & Abassi, 2009). When the country earns more from exports tan expenditure on imports, its balance of trade is high thus strengthening its currency. Failure to achieving constant balance on net revenue of trade leads to fluctuations in AUD.
Level of Public Debt by the Government also Contributes To the Trend
If the country spends much budget deficit on its budget to stimulate the public local economy, it scares investors from foreign countries. This is possible because a country suffers from inflation caused by huge debts used to stimulate the local economy. Inflation scares economy by lowering the currency value in the international market.
Problem of Current Account Deficit
When a country decides to spend more on imports than earnings from exports, it operates on deficit thus borrows from financiers to sustain economy thus fluctuating currency by lowering its value.
Interest Rates
The interest rate is a country’s monetary policy implemented by Australian Central Bank. Reduced interest rates lower the currency value due to scared investors who fails t invest in the country. However, increased interest rates increase currency value. Such pattern fluctuates AUD.
Projection on the Behavior of AUD by End 2016
I do not think AUD will fall to US 65C by end 2016. The current market situation as illustrated is not an intervention by US Central Bank or Australia Reserve Bank, but it is simply a market adjustment. Through natural processes of demand and supply forces for market change, expansionary and contractionary reactions happen to determine the market stability level for US dollar and AUD (Nakakubo & Okada, 2001). The adjustments shift the stability of a weaker currency depending on the market trends and exchange rates. After attaining normal market status, each currency attains its normal market value. Therefore, in the course of the year, through market processes, AUD will attain its stability, though not much but not around US 65C.
Intervention of Reserve Bank to Raise Exchange Rate to 70C
Reserve bank can intervene in the market to increase the country’s currency value by using different mechanisms. The Reserve Bank can intervene by buying local currency. Meaning it bought AUD and sold US dollar. Purchasing AUD reduces the amount of money in circulation thus its demand rises (Browning, 2007). The rise in demand of AUD will negate the value of US dollar in the exchange market. This is due to increase in US dollars in circulation. The increase in US dollar is caused by a sale of US dollar by Reserve Bank. Thus the value of US dollar in the market is diluted.
AUD Gains Its Value to Achieve Exchange Rate Level of 70C
The side effect of the intervention is on the country’s exports. The increase in the AUD value is positively correlated with an increase in prices of products. Therefore, prices of exports will shoot in the foreign markets. It will also lead to increase in demand of AUD in the domestic market thus discouraging investors. Such behavior causes the unequal balance of trade and trade deficits.
The increase in prices discourages international consumers to consume the country’s products. Instead, they will switch to other nations’ exports for similar products at lower prices. The action will be active. AUD will gain its strength, improve its value and weigh at least higher as opposed to before (Bacchetto, 2000). However, the stability will not last for an extended period. The intervention will only operate at a short run then without natural market adjustments, after a shorter period AUD value will begin declining again.
References
Bacchetto, M., (2000). Predicting Short Term Currency Fluctuations Case study: the AUD. Change, 28, pp.0-0043.
Browning, E.S., (2007). Reading market tea leaves. The Wall Street Journal Europe, pp.17-18.
Nakakubo, F., & Okada, A. (2001). A New Framework for Currency Strategy—The Fusion of Fundamental Analysis and Financial Engineering. NLI Research Institute.
Nakakubo, F., & Okada, A. (2001). A New Framework for Currency Strategy—The Fusion of Fundamental Analysis and Financial Engineering. NLI Research Institute.
Svensson, M., & Al Abassi, Z. (2009). Vd-ersättning: en empirisk studie av 43 börsnoterade företags bonusutdelningar.
Seidler, M., & Grip, O. (2007). Valutasäkring inom medicintekniska företag.
Tepuš, M. M. (2007). Analiza modela financiranja dugoro?nih kredita posredstvom tržišta kapitala u Hrvatskoj. Ekonomski pregled, 58(7-8), 465-488.
Downes, P., Hanslow, K., & Tulip, P. (2014). The effect of the mining boom on the Australian economy. Reserve Bank of Australia.
Bedeian, A. G. Caveat Emptor,(2002), The Gourman Report. The Industrial-Organizational Psychologist, June.
Mahajan-Bansal, N. (2013). Does the World Need another B-School Ranking?. Poets and Quants.
Cox, S. M. U. (2010). Part Time MBA Programs–Side By Side Comparison. SMU Cox School of Business, 19.
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