ASSIGNMENT 1: RESEARCH REPORT 2
Running head: ASSIGNMENT 1: RESEARCH REPORT 1
Assignment 1: Research Report
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Introduction
The international financial market is a dynamic subject. The official Australian currency, the “Aussie dollar” is ranked among the most traded currency in the stock market. Consequently, the Australian dollar (AUD) and the United States dollar (USD) is a popular pair in the foreign exchange market. Recently, the AUD has reached its lowest point in ten years in the foreign exchange market. Several factors have led to the decline of the “Aussie dollar” in the market including commodity prices, interest rates. The decline in currency value has effects on the economy and firms as well as their competitiveness in the international market. The Reserve Bank of Australia plays a fundamental role in changing a currency’s value in the foreign exchange. The paper focuses on the tumbling AUD as highlighted by the “Sydney Morning Herald” article and its trends in the previous years. It also depicts the causative factors and effects of the Australian dollar to the economy.
Article summary
The Australian dollar has hit its lowest mark in the last ten years. Significant changes are observed with Australian dollar dropping below US70c to its lowest point in the previous decade. According to Moore (2019), on 2nd January 2019, the currency broke through the 70 US cents mark throughout the night, only to drastically fall to as low as US67.49c in early trade; however, at about 10 am Australian eastern daylight time, it had improved relative to sell for approximately 68.71 US cents. In December 2018, the currency decreased by 3.4 per cent ending the year 10 per cent less than how it began.
On the contrary, in the year 2017, the money had appreciated by 8.7 per cent (Moore, 2019). All these changes are accredited to certain factors such as market forces in the stock trade. In general, the Australian dollar has experienced numerous significant modifications within the stock exchange market, including reaching its lowest mark in the last ten-year span.
The Australian-US dollar exchange rate is affected mainly by market forces that are best explained using the demand-supply model of the exchange rate. Moore (2019) reveals that demand for goods from the euro region manufacturing industry has drastically dropped for the last three months; furthermore, the export demand for the commodities has weakened subsequently. The primary reason for the decreasing demand is the slowdown in Germany. Output generally improved; however, with new orders subsiding, businesses’ work backlogs are reducing; the drop rapidly began as of November 2014. The employment growth remains unaffected, though, with the current situation of declining output growth and new orders, it will not last. The economic and industrial factors stated relating to demand have caused the reduced supply of the Australian dollar. Moreover, a currency’s value is affected by various factors; among them, demand flows (GSU, n.d.). Therefore, demand and supply directly affect exchange rates as in this case, reduction in order has led to the declining value of the Australian dollar.
Analysis of AUD-USD nominal exchange rate
Generally, the nominal exchange rate of the Australian and US dollar has changed over time. The nominal exchange rate is the equivalent number of units of local currency to a foreign currency. In this case, the local money in focus is the Australian dollar while the US dollar is the foreign currency. To accurately highlight the variation, I analyze monthly data of the last three years from the reserve bank of Australia. According to Reserve Bank of Australia(RBA) (2019a), 2016 began with a slight drop of the “Aussie dollar” from 0.73c in the previous year to 0.71c.
Similarly, in the second month of 2016, there was no notable difference, and the currency was valued at 0.71c; however, during the following two months, the value rose to 0.76. It continually fared well as compared to the beginning of the year. Eventually, the year ended with an amount of 0.74 US dollars in November and 0.72 USD in December. Correspondingly, 2017 was another year with many variations but with notable differences as compared to 2016. As per January 2017, it had improved to 0.75 and further to 0.76c in the second and third month.
Nevertheless, it declined to 0.74c in the following two months only to improve to 0.76c in June. July marked the highest currency value for both the 2016 and 2017 0.79 US dollars. Generally, 2017 revealed slight improvement in the currency value compared to 2016. Over the years, AUD-USD nominal exchange rate has altered positively in 2016 and 2017.
At time progressed, the Australian dollar strived to be competitive in the market. The “Aussie dollar” commenced the year at a value of 0.80 US dollars. So far, the 0.8 mark is the highest mark observed in 2016,2017 and 2018. However, due to the market’s competitiveness, the value subsequently declined over time. The following the three months saw the decrease of 0.1 USD, that is, the cost was at 0.77c,0.76c and 0.75c for February, March, and April respectively. The following months were not any different, May’s value was similar to that of April though it further reduced to 0.73c in June and improved to 0.74c in July. Later, the currency seemed to drop over time continually. In August the value declined by 0.2c and remained constant in September.
Nonetheless, this wasn’t the case in October. In this month, the value further dropped by 0.2c making it worth 0.70 US dollars (RBA, 2019). As the stock market is known to change over time continually, the AUD-USD value in November was at 0.73 and then later fell to 0.70 in December. Conclusively, 2018 is the year that has had the most variations as well as the highest currency value. The differences in the currency may be attributed to numerous factors. For instance, the competitiveness of other foreign currency may make them more value and thus the local currency drops in their values. Secondly, demand and supply are market forces that decrease and increase in the amount of currency in foreign exchange. The Australian dollar nominal exchange rate has drastically different years due to any of the variety of factors affecting the stock market.
Main factors causing AUD decade low decline
There are certain factors that may be considered as the major causes of the depreciating value of the Australian dollar to a ten-year low. They include purchasing managers’ index (PMI), commodity prices and interest rates. The PMI is an indicator used to foretell changes in the economy and manufacturing trends; it provides information on the changes in demand and supply within the economy (Habanabakize & Meyer, 2007). Moore (2009) relays that the global manufacturing PMI, issued by Markit in December 2018 has dropped for the eighth month continuously to its lowest point in more than two years. The dropping PMI clearly explains the tumbling value of the Australian dollar. Furthermore, reduced PMI results in lower demand and supply in the foreign exchange market. Moreover, London trading experienced a sharp decline in values for both aluminium and copper of more than 2 per cent (Moore, 2019). Copper and aluminium trading contributes to a significant part in the Australian economy, and thus its reduction directly drops the value of the currency. According to Boyd (2019), the Reserve Bank anticipates to be inclined to increase interest rates but is less enthusiastic about it. Generally, the higher the interest, the higher the currency value; this is because higher interest rates attract investors thereby increasing the demand and supply of the currency. The prevailing low-interest rates in Australia explains the falling currency value. Therefore, the factors outlined such as PMI and interest rates are the major causes of the tumbling Australian dollar value.
Effect of the dropping AUD on Australian exporting firms and economy
With the fall of the Australian dollar value, the economy and exporting firms are affected in various ways. As a software firm exporting goods to the United States with the current low currency values, more of the products will be purchased; due to the relative weakness of the AUD, the Australian commodities will be cheaper thus allowing foreign monies to buy more of the goods and hence more desirable to traders. In this situation, Australian firms and traders become more competitive in the international market, which is positive for the economy; on the contrary, the price for imports will rise due to the weak currency thus negatively affecting consumers. In this case, the demand for imported goods will reduce creating a gap. To fill the created opportunity, the industries within the country will increase their supply with the increasing demand. To meet rising demand for their goods, Australian business will have to employ more workers thereby reducing unemployment rates, which is favourable to the economy (Reserve Bank of Australia, 2019b). Therefore, a negative trend in the currency value may bring about positive effects on exporting firms as well as the economy.
Reserve Bank of Australia action to raise AUD value and its side effects
The Reserve Bank of Australia is capable of altering the Australian amount in the stock exchange market. Assuming the AUD is stable at US 70C per AUD, the bank may be inclined to raise currency value to lower the inflation rates. Firstly, hiking inflation rates may be due to the rising price of imported services and goods. Secondly, the growing demand and employment opportunities will increase incomes and other charges that are production inputs and contribute to the pricing of commodities and thus higher inflation (Reserve Bank of Australia, 2019b). At this point, if the bank may tend to raise the AUD value to maybe a US 73C per AUD mark, it will do the following activities. For instance, the bank may raise the interest thereby attracting investors and increasing the currency value. The bank may also set monetary policies and conditions aimed to raise the AUD value to US 73C mark. The bank’s action will lower the inflation rate as well as making conditions favourable to consumers. In conclusion, the Reserve Bank of Australia may be inclined to take action depending on the prevailing conditions.
Conclusion
In summary, the Australian dollar has reached its lowest point since the last ten years, US 67.49C per AUD. Moreover, the currency depicted a gradual decrease in value in the year 2018. The falling money can be attributed to demand and supply market forces in foreign trade. Analysis of the AUD monthly data of the last three years from the Reserved Bank of Australia reveals the numerous variations of the currency. The tumbling of the AUD is mainly attributed to the falling PMIs, reducing commodity prices and low-interest rates; these factors influence demand and supply of the currency. With the falling “Aussie dollar”, Australian exporting substantial benefit since their goods are cheaper compared to other monies, which is good for the economy. However, this results in higher importation prices and thus higher inflation rates. In such a case, the Reserve Bank may be inclined to take action stabilizing the situation such as increasing the interest rates. Therefore, the AUD trend in foreign exchange is determined by numerous factors within the market forces.
References
Boyd, T. (2019, January 1). Financial Review quarterly survey of economists: ASX to bounce back in 2019. Financial Review.
GSU. (n.d.). The Determination Of Exchange Rate [ppt]. Retrieved from http://www2.gsu.edu/~wwwmms/8040fall07/Notes/ch02.ppt
Habanabakize, T., & Meyer, D. F. (2007). An Analysis Of The Relationships Between The Purchasing Managers’ Index (PMI), Economic Growth And Employment In The Manufacturing Sector In South Africa. International Journal Of Economics And Finance Studies, 9(2).
Moore, T. (2019, January 3). Australian dollar tumbles to a ten-year low — the Sydney Morning Herald.
Reserve Bank of Australia (2019a). Historical Data. Retrieved from https://www.rba.gov.au/statistics/historical-data.html
Reserve Bank of Australia (2019b). Exchange Rates and the Australian Economy. Retrieved from https://www,rba.gov.au/education/resources/explainers/pdf/exchange-rates-and-the-australian-economy.pdf