Explanation Of The Australian Exchange Rate System Economics Essay

The exchange rate reflects the buying power of one currency against another currency. With a strengthen in Australian dollar against US dollar, it might intend that less Australian currency demand to be cost to purchase one US currency. In this paper, it will analyze the tendency of AUD/USD exchange rate for the past 10 old ages and calculate the exchange rate for 1 twelvemonth in front. Finally, there will be some advices to a financess direction house based on the analysis and prognosis of the AUD/USD exchange rate.

The tendency line in the graph above shows a tendency of AUD/USD exchange rates for the over past 10 10 old ages. At the first glimpse, an increased in tendency could be easy seen although some fluctuations exist. The exchange rate goes up from 0.658 on January 1st 2000 to 1.067 on May 13th 2011, which is recorded a 68.16 % addition since January 1st 2000. Although it shows a strong increased tendency during this 10-year period, there are some outstanding points need to be paid attending to.

The first important period is the period A in the graph above. It is a recession of Australian currency that from the 2nd half of 2000 to 2001. This is a post-crisis period after the 1998 Asia fiscal crisis. It hit the lowest point within the past 10-year on March 30th 2001 by 0.4890 due to a weak demand of Australian dollar. Although the Olympic Games had impacts on hiking the economic system, the economic system turned down aggressively after the Olympics. ( OECD, 2001 )

After the recession in 2001, continues strengthen in the Australian currency compared with US dollar until 2008. The exchange rate had reached 0.9786 on 16th of July in 2008, which is shown as point A in the graph above. But this would look like a turning point, the exchange rate continued weaken due to the planetary fiscal crisis after that point.

However, the Australian dollar merely stayed at a low degree in a short period. After point C which is about the 2nd one-fourth in 2009, the Australian dollar is maintaining as a strong currency. Until now, it moves up fast and continues to hit a highest point relation to US dollar. This tendency may propose that Australia is confronting a strong recovery and a strong demand of Australian dollar after the planetary fiscal crisis.

Economic and fiscal accounts of the past tendencies

Exchange rate is determined by the supply and demand under the floating exchange rate system. The domestic economic growing slowed down and went to a recession from the 2nd half of 2000 to 2011. The may propose that there was a lessening in domestic demand. Although the 2000 Sydney Olympic Games has boosted the economic system in the first half of 2000, the economic growing turned down aggressively after the Olympics. ( OECD, 2001 ) These economic factors besides had impacts on the exchange rate. During this period, the exchange rate of Australian dollar once more US dollar was remaining at a low degree and had reached the lowest point for the yesteryear 10 twelvemonth.

The chief cause might be the debut of 10 percent Goods and Services Tax ( GST ) . ( OCED, 2001 ) The proposition is that the GST is paid by consumers, non by the concerns. ( Cooper and Vann, 2000 ) Therefore the consumer assurance would be affected by the GST as their buying power decreased. This could be reflected by the tabular array below, it was recorded the entire domestic demand growing rate fell a batch from 1999 to 2001. The important beads in the growing of domestic demand might take to a lessening of demand of domestic currency. Therefore, the exchange rate would be decreased as the domestic currency has weakened.

In add-on, the involvement rate derived functions might give another sensible account. Although the domestic involvement rate went up at in 2000, the exchange rate still went down. This might caused by other factors. At the same clip, the US authorities raised the US involvement rate dramatically by following a high involvement rate policy. ( Jia, 2010 ) Therefore, it led to a lessening in exchange rate even if the involvement rate of Australia increased.

The 2nd salient point could non be ignored that is happened in 2008, which is a twelvemonth suffered planetary fiscal crisis. The exchange rate motion seems unusual during the GFC. As can be seen in the graph above, it shows unusual motions during the crisis. A dramatic bead in exchange rate of Australian dollar against US dollar. During the GFC period, the capital typically flowed to the states and transferred into safe haven currencies, such as US dollar. ( Kohler, 2010 ) . It may propose that the tonss of Australian dollars would reassign to the safe oasis currencies. It may do a dramatic lessening in demand of Australian currencies. As a consequence, the Australian would deprecate against US dollar.

The export and import alterations could besides impact the exchange rate. As the export index graph below, the existent export weighted index has a immense lessening although the export index increased from 2008 to 2009. That might bespeak that the imports increased faster than exports in that period. As the existent exports fell down, the demand of Australian currencies might travel down so the exchange rate may travel down every bit good.

( Beginning: Jia, 2010 )

However, from the 2nd one-fourth of 2009, the Australian shows a strong increasing tendency against US dollar. First, such addition may caused by the high trade good monetary values. The undermentioned graph of RBA index of trade good monetary values shows a tendency of trade good monetary values clearly. It can be easy discovered that the trade good monetary values rose truly fast from 2009 to 2010. Higher export trade good monetary values may take to more sums of Australian currencies for abroad to by Australian merchandises. Hence, the demand of Australian dollar would travel up and do the exchange rate goes up.

( Beginning: Ravimohan, 2010 )

In add-on to this, the foreign capital influxs would be another factor that boosts the exchange rate increased. High involvement policy is ever adopted by the Australian authorities. Australia stays a high degree of involvement rate compared to most of other states. Large sum of capital would attracted by the high involvement rate and come into Australia market. Then it might excite the Australia currency.

Prediction of future waies ( 1 twelvemonth in front ) of the exchange rate

The involvement rate para may be a helpful technique to calculate the involvement rate. If the involvement is different between two states, the future exchange rate may change from the topographic point exchange rate. From the graph of the spread of the RBA hard currency mark rate and US federal financess rate below, it shows a increased tendency from 2010 to 2011. And the spread between the involvement rate of these two states seems continue to be larger. If other state of affairss are hold, and this difference continues to be larger, the Australian currency would go on to be stronger in the undermentioned twelvemonth. Because the difference is traveling to be increased, a higher involvement rate difference might pull more capital come into Australia market and so force the demand of Australian currency up.

In add-on, the outlook of growing of involvement rate could hold impacts on the alteration of exchange rate. The following tabular array shows the expected growing of involvement of US and Australia. The growing rate of involvement in US market is expected to be zero while the outlook growing rate of Australian market is 0.02. With a larger expected growing rate of involvement in Australia, more foreign investors might be attracted to put in Australian market and it might drive up the value of Australian dollar against US dollar. Therefore, the exchange rate of AUD/US could be expected to be higher in the undermentioned twelvemonth.

The buying powers of 2 states & A ; acirc ; ˆ™ currencies besides affect the exchange rate between these two states. The rising prices rate would be an effectual index that could reflect the consumer & A ; acirc ; ˆ™s buying power. From the prognosis of RBA statistics, the expected rising prices in 2011 would be making 3 % . ( RBA, 2011 ) . And the long term rising prices mark set by the US federal authorities is 1.7-2 % which is expected to be a spot lower than the Australian outlook. ( US rising prices reckoner, 2009 ) These figures might bespeak that if the trade good monetary value of Australia would be higher than US trade good monetary value, so the Australia dollar should appreciate against US dollar in the hereafter. Therefore, the exchange rate would be expected to be traveling up from the past tendency information and the prognosis.

Harmonizing to the analysis and prognosis above, the AUD/USD exchange rate is forecasted to be traveling up in the hereafter. Based on this, if I advice a financess direction house, to borrow the financess in US, and put them into Australian market would be a reasonable pick. Borrow money today in US and change over them into Australian dollar, so put them into Australian market. When this investing mature in the hereafter, with a higher exchange rate compared to today, the grasp of Australian dollar would give more net income if these financess convert back to US dollar. If the company is hold US liabilities, the best pick would be keep them and pay back afterwards. The higher the Australian dollar, the less need to pay back for the US debts.