Evaluation of the Sudden Drop in the Value of Australian Dollar

This assignment evaluates the reasons behind the sudden decrease in the value of the Australian dollar and suggests measures to improve it. It discusses the determination of AUD and USD exchange rates by market forces and analyzes the factors contributing to the behavior of exchange rates. The impact of the drop in AUD on the business and the Australian economy is also explained.

ECONOMICS FOR
PROFESSIONAL
(AUSTRALIAN DOLLAR
TRUMBLES TO TEN YEAR LOW)

EXECUTIVE SUMMARY
The sudden drop in the value of An Australian dollar is evaluated with the help of this
assignment to get to know about all the reasons behind the uncertain decrease in the value.
The reasons come in the bigger picture that weaker growth of the industry’s output from
China and the European Union are behind the sudden decrease in the value of an Australian
dollar. The article published in the Sydney morning herald draw light on this topic. The
authenticity of the information mentions in the article will help with further research. With
the help of this research, RBI of Australia is suggested to improve the value of an Australian
dollar.
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TABLE OF CONTENTS
ASSIGNMENT 1.......................................................................................................................1
1. Discuss issues discussed in the article and explain how AUD and USD exchange rates
are determined by market forces using demand and supply model of exchange rates...........1
2. Analyse movement in AUD-USD exchange rates and describe factors contributing to the
behaviour of exchange rates...................................................................................................2
3. Summarize driving factors behind the movement of AUD in the article and explain how
these factors affect the demand or supply of AUD-USD market...........................................6
4. Explain the impact of recent drop in AUD on the business and describe how depreciation
of AUD will affect the entire Australian economy................................................................7
5. What actions reserve bank of Australia could take to increase the AUD from 70C per
AUD to 73C per AUD and its side effects that might affect Australian economy................8
REFERENCES...........................................................................................................................9
APPENDICES..........................................................................................................................11

INTRODUCTION
Current report is about the evaluation of an article on different criteria’s used in the
assignment to tests the authenticity of the information mention in the article. Sudden decrease
in the Australian dollar has witnessed which decline to 70C per Australian dollar which is
consider as the lowest value in a period of 1 decade (Cuestas & Gil-Alana, 2009). The whole
world is shocked that how this much decrease has witnessed by the Australian economy. This
report will stresses on several aspects such as determination of exchange rates by market
forces, factors contributing to its impact on the Australian economy.
ASSIGNMENT 1
1. Discuss issues discussed in the article and explain how AUD and USD exchange rates are
determined by market forces using demand and supply model of exchange rates.
The prominent reason behind this sudden decline is weaker production of
manufacturing industries set up in China and the European Union (Australian dollar tumbles
to ten-year low, 2019). Australia’s revenue comes from these two important sources which
help in increasing the global growth of the nation (Ramsay & Leslie, 2008). But sudden
decreasing of revenue from this source affects the entire economy due to which the currency
value of the Australian dollar faces decline.
A Drop in the growth of industries in China and the European Union covering two
major countries in this region such as Spain and Italy (Valadkhani & Smyth, 2018).
Uncertainty imposed on the Australian economy will result into a declining value of its own
currency. This will, in turn, affects the entire market demand of Australia’s output to sell in
the foreign market.
But due to this drop in the currency value of the Australian dollar, the value of the
Euro gets increases as the value of the Euro gets increases. As this tragedy, opens up a new
path for Eurozone manufacturing industries in comparison to the Australian dollar
manufacturing region (Ramsay, Richman & Leslie, 2017).
The demand for the supply model helps an economy in estimating the exchange rate
of the future period by knowing its future demand and the supply (Bahmani‐Oskooee &
Nayeri, 2018). This model will help in identifying two exchange rates of two currencies such
as the Australian Dollar and US dollar.
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Exchange rate under the demand and supply model will act as a price of a currency
that tells the value of one Australian dollar for one US dollar. The exchange rate is essential
to track the progress of the Australian dollar when converted into US currency while dealing
in foreign exchange markets (Zamani, 2016).
The exchange rate of a currency is considered on y-axis and quantity on the x-axis to
graph the Australian and US dollar on the foreign exchange market on the final graph. The
values plot on the graph to estimate the equilibrium in the demand and the supply of the
exchange rates will incur or not (Berger-Thomson & Chapman, 2017).
Price Demand Supply
0.72 100.0000 80
0.78 150.0000 150
0.7 200.0000 180
Table 1 Demand and supply of Exchange rates
0.7236 0.78 0.7
0.0000
50.0000
100.0000
150.0000
200.0000
250.0000
Demand
Supply
Table 2 Demand and supply of Exchange rates
Interpretations
In the above mention demand and the supply model, on one point that is at an
exchange rate of 0.78 both the demand and the supply meet each other. This particular is also
considered as the equilibrium point where the user gets in-different in deciding its final
output (Kim, 2015).
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2. Analyse movement in AUD-USD exchange rates and describe factors contributing to the
behaviour of exchange rates.
2016 Exchange rates
Jan 0.7100
Feb 0.7140
March 0.7657
April 0.7655
May 0.7242
June 0.7426
July 0.7522
Aug 0.7514
Sept 0.7630
Oct 0.7613
Nov 0.7474
Dec 0.7236
Table 3 2016 Exchange rates
Jan
Feb
March
April
May
June
July
Aug
Sept
Oct
Nov
Dec
0.6800
0.6900
0.7000
0.7100
0.7200
0.7300
0.7400
0.7500
0.7600
0.7700
2016 Exchange rates
2016 Exchange rates
Table 4 2016 Exchange rates
Interpretations
The exchange rate of the Australian dollar to the US dollar for the year 2016 shows an
increasing trend except slightly declining in two months. The performance of the Australian
economy gets positively affected by the increasing exchange rate. Due to this the currency
value of the Australian dollar gets strengthen as compare to the US dollar. The increasing
exchange rate is due to the low inflation rate of 1.30% in 2016 which was 1.51% in the
previous year that is 2015. Decreasing the rate of inflation will, in turn, increases the foreign
exchange rates (Petersen, Rotolo & Leydesdorff, 2016).
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2017 Exchange rates
Jan 0.7567
Feb 0.7688
March 0.7644
April 0.7475
May 0.7450
June 0.7692
July 0.7987
Aug 0.7898
Sept 0.7839
Oct 0.7673
Nov 0.7585
Dec 0.7800
Table 5 2017 Exchange rates
Jan
Feb
March
April
May
June
July
Aug
Sept
Oct
Nov
Dec
0.7100
0.7200
0.7300
0.7400
0.7500
0.7600
0.7700
0.7800
0.7900
0.8000
2017 Exchange rates
2017 Exchange rates
Interpretations
Fluctuations witnessed in the nominal exchange rates of the Australian economy as
initially, the graph shows an increasing trend then declining and again gets an upward trend.
First, three months starting from Jan to March shows a positive and increasing rate which
suddenly gets decreases in April and May and again gets increases. This fluctuation in the
exchange rate is due to market speculation which gets fluctuated due to the changing
demands of the investors.
Table 6 2017 Exchange rates
2018 Exchange rates
Jan 0.8073
Feb 0.7792
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March 0.7665
April 0.7570
May 0.7564
June 0.7391
July 0.7431
Aug 0.7260
Sept 0.7222
Oct 0.7085
Nov 0.7316
Dec 0.7058
Table 7 2018 Exchange rates
Jan
Feb
March
April
May
June
July
Aug
Sept
Oct
Nov
Dec
0.6400
0.6600
0.6800
0.7000
0.7200
0.7400
0.7600
0.7800
0.8000
0.8200
2018 Exchange rates
2018 Exchange rates
Table 8 2018 Exchange rates
Interpretations
The period of 2018 shows clear cut declining trend of exchange rates from January to
December due to changes in the currency value. The higher declining of an exchange rate is
due to decreasing currency value of an Australian dollar in the international market.
Factors held responsible for fluctuations in Exchange rates
Inflation rate- This is one of the reasons behind the increasing or decreasing exchange rates
of the Australian dollar into the US dollar. Fluctuations in the inflation rates of an Australian
economy will directly affect the foreign exchange rates. The higher inflation rate will
decrease the current value which weakens the Australian dollar as compared to other
currencies in the world (Arghyrou & Pourpourides, 2016). The lower inflation rate will
increase the exchange rates and also enhances the currency value of Australia and also
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strengthens the entire economy. The inflation rate in the year 2016 was 1.30%, which gets
increases to 1.91% in 2017 and again gets decreases to 1.26% (Lu, Adnan, Basak, Pereira,
Carrion, Saber & Ben-Akiva, 2015).
Interest Rates- Fluctuation stakes places in the interest will not affect the currency but also
affects the overall exchange rates of the country. Declining trend witnessed by the nation in
2018 and slightly decrease in 2016 and 2017 is due to the severe changes takes places in the
overall interest rates of the Australian economy (Malkiel, 2015). The currency value of
Australia presents the entire worth of the economy in the international market (Zhang, Dufour
& Galbraith, 2016).
Market speculation- Changes takes places in the tastes and the preferences of investors in
the market will, in turn, fluctuate the overall trend in a market. Nowadays, investment banker
analyses the market speculation by analysing the market using various criteria’s. In the
current case, the movement of the foreign exchange rate is tracked to know the final output.
An investor will watch out exchange rates before indulging into any commercial transactions
takes places outside its own country (Chung & Zhang, 2017).
Political instability- Turbulences in the political state of Australia also play an important
role in shifting the movement of exchange rates to higher or lower trend. Rigid political
actions and regulations will increase the import duty on all the products imported from
outside Australia. This action of the Australian government will, in turn, affect the businesses
of the nation as an entity’ business depends on the foreign import products will get affected
by this action of the government (Juvenal & Petrella, 2015).
3. Summarize driving factors behind the movement of AUD in the article and explain how
these factors affect the demand or supply of AUD-USD market
It is important to discuss all the trigging factors that drive the movement of AUD
mention in the given article. Some of the factors identified by a user by analysing the article
about the positive or negative value trend of the Australian dollar are given as below:
Weaker growths of manufacturing industries- the Australian economy witness a decline
in its currency value to 70C per dollar. This tragedy has affected a lot of people in the nation
and outside the country who has a significant interest in this country. The industries set up in
China, Spain and Italy gets decreases which directly affects the exchange rates and the
currency value of this country. This condition has occurred due to the trade relationships
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between Australia and China gets affected by the war as this considers as a direct effect of
war (Brunetti, Büyükşahin & Harris, 2016). This further deteriorates the business connection
of this nation with several other countries who are importing goods in its country from
Australia. The image of this country gets affected which, in turn, decreases the tourism of this
place and the arrival of immigrants to this place gets decreases with this sudden drop. An
individual who wishes to start its employment career in this place will change its decision due
to the decrease in the currency value of Dollars in Australia. Foreign investors will change its
minds as the depreciating value of AUD will not generate enough returns for them which end
with withdrawing interest from businesses sets up in this place.
Declining growth of purchasing manager’s index- This article also points out towards low
purchasing manager’s index to 49.7. This symbolizes the health of the manufacturing
industry as the economic status of industries can estimate with the increasing or decreasing
value of the PMI index (Lloyd, Truong & Gray, 2018). A higher PMI depicts the strength of
industries that shows its profits and gains and lower value depicts its weaknesses in front of
the international market. Immense competition in the external market is one of the reasons
behind the lower value of PMI.
4. Explain the impact of recent drop in AUD on the business and describe how depreciation
of AUD will affect the entire Australian economy
In the current case, Software products exported by Australian companies to the united
nation but due to the drop in the value of a currency, this business connection among
companies got affected. Due to the drop in AUD, the customs duty applicable on the goods
exported from Australia gets increases which will directly affect the company who is
importing goods from this country. In the given case, an Australian company who are trading
with US Company in exporting software products will not purchase more goods from this
place due to higher prices and higher export and import duty applicable by the customs
officer (Black, Griffin, van der Sleen, Wanamaker Jr, Speer, Frank & Griffin, 2016). US
company purchasing software from Australia will have to pay export as well as the import
duty on the software due to a sudden decline in the value of an Australian dollar.
The depreciating value of AUD is require by consumers in the Australia as due
to this the prices of commodity gets decreases which is an advantage for all the buyers but at
the same time it is not beneficial for the economy. Decreasing commodity prices and
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currency value will directly affects the gross domestic production of the country which needs
to be stabilized.
5. What actions reserve bank of Australia could take to increase the AUD from 70C per AUD
to 73C per AUD and its side effects that might affect Australian economy
A strategy has identified the reason held responsible for the downward movement of
AUD value which comprises of lower global growth, decreasing commodity prices and Asian
currencies. A reserve bank could some of the actions to increase the value of AUD from, 70C
to 73C by making significant changes in the economic policies.
Increasing global growth is one of a reason for appreciating the dollar’s value as when the
dollar’s value tumbles to its lowest point; lower global growth comes as the main reason
behind this issue. This is an indicator that by increasing global growth, an economy will
increase its overall revenues and gains.
Falling value of commodity prices will affect the terms of trade which consists of
exports and import of iron ore and coal products mainly extracted from Australia.
Asian currencies will get appreciated in increasing the AUD/USD exchange rates
which will directly appreciate the value of an Australian dollar.
All these actions taken by the reserve bank of Australia will directly affect the overall
economy of Australia as the GDP and economic status of an entity gets improved with the
action of an enterprise.
CONCLUSION
It is summarized from the above study that the drop in the value of a currency will, in turn,
decreases the commodity price of domestic goods available in Australia such as copper and
aluminium which suppressed by -2.1% and -2.7%. This negative declining of commodity
value is another reason behind the weaker growth of the china and European Union. With all
these actions, investors have withdrawn its interest from the companies in this nation who are
itself struggling with the external market changes.
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REFERENCES
Books and journals
Arghyrou, M. G., & Pourpourides, P. (2016). Inflation announcements and asymmetric
exchange rate responses. Journal of International Financial Markets, Institutions and
Money. 40. 80-84.
Bahmani‐Oskooee, M., & Nayeri, M. M. (2018). Policy Uncertainty and the demand for
money in Australia: An asymmetry analysis. Australian Economic Papers. 57(4). 456-469.
Berger-Thomson, L., & Chapman, B. (2017). Foreign Currency Exposure and Hedging in
Australia. RBA Bulletin, December, 67-75.
Black, B. A., Griffin, D., van der Sleen, P., Wanamaker Jr, A. D., Speer, J. H., Frank, D.
C., ... & Griffin, S. (2016). The value of crossdating to retain high‐frequency variability,
climate signals, and extreme events in environmental proxies. Global change biology.
22(7). 2582-2595.
Brunetti, C., Büyükşahin, B., & Harris, J. H. (2016). Speculators, prices, and market
volatility. Journal of Financial and Quantitative Analysis. 51(5). 1545-1574.
Chung, S. S., & Zhang, S. (2017). Volatility estimation using support vector machine:
Applications to major foreign exchange rates. Electronic Journal of Applied Statistical
Analysis. 10(2). 499-511.
Cuestas, J. C., & Gil-Alana, L. A. (2009). Further evidence on the PPP analysis of the
Australian dollar: Non-linearities, fractional integration and structural changes. Economic
Modelling. 26(6). 1184-1192.
Juvenal, L., & Petrella, I. (2015). Speculation in the oil market. Journal of Applied
Econometrics. 30(4). 621-649.
Kim, S. J. (2015). Australian dollar carry trades: time varying probabilities and
determinants. International Review of Financial Analysis. 40. 64-75.
Lloyd, A., Truong, S., & Gray, T. (2018). Place-based outdoor learning: more than a drag and
drop approach. Journal of Outdoor and Environmental Education. 21(1). 45-60.
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Lu, Y., Adnan, M., Basak, K., Pereira, F. C., Carrion, C., Saber, V. H., ... & Ben-Akiva, M.
E. (2015, January). Simmobility mid-term simulator: A state of the art integrated agent
based demand and supply model. In 94th Annual Meeting of the Transportation Research
Board, Washington, DC.
Malkiel, B. G. (2015). Term structure of interest rates: expectations and behavior patterns.
Princeton University Press.
Petersen, A. M., Rotolo, D., & Leydesdorff, L. (2016). A triple helix model of medical
innovation: Supply, demand, and technological capabilities in terms of Medical Subject
Headings. Research Policy. 45(3). 666-681.
Ramsay, H. A., & Leslie, L. M. (2008). The effects of complex terrain on severe landfalling
Tropical Cyclone Larry (2006) over northeast Australia. Monthly Weather Review. 136(11).
4334-4354.
Ramsay, H. A., Richman, M. B., & Leslie, L. M. (2017). The modulating influence of Indian
Ocean sea surface temperatures on Australian region seasonal tropical cyclone
counts. Journal of Climate. 30(13). 4843-4856.
Valadkhani, A., & Smyth, R. (2018). Asymmetric responses in the timing, and magnitude, of
changes in Australian monthly petrol prices to daily oil price changes. Energy Economics.
69. 89-100.
Zamani, N. (2016). The Relationship between Crude Oil and Coal Markets: A New
Approach. International Journal of Energy Economics and Policy. 6(4). 801-805.
Zhang, H. J., Dufour, J. M., & Galbraith, J. W. (2016). Exchange rates and commodity
prices: Measuring causality at multiple horizons. Journal of Empirical Finance. 36. 100-
120.
Online
Australian dollar tumbles to ten-year low, 2019. Available through: <
https://www.smh.com.au/business/markets/australian-dollar-slides-below-us70c-20190103-
p50pbq.html > [Accessed on 28th March 2019].
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APPENDICES
1. Exchange rates data
F11 EXCHANGE RATES
Title A$1=USD
Description
AUD/USD Exchange Rate; see notes for further
detail.
Frequency Daily
Type Indicative
Units USD
Source WM/Reuters
Publication date 28-Feb-2019
Series ID FXRUSD
29-Jan-2016 0.7100
29-Feb-2016 0.7140
31-Mar-2016 0.7657
29-Apr-2016 0.7655
31-May-2016 0.7242
30-Jun-2016 0.7426
29-Jul-2016 0.7522
31-Aug-2016 0.7514
30-Sep-2016 0.7630
31-Oct-2016 0.7613
30-Nov-2016 0.7474
30-Dec-2016 0.7236
31-Jan-2017 0.7567
28-Feb-2017 0.7688
31-Mar-2017 0.7644
28-Apr-2017 0.7475
31-May-2017 0.7450
30-Jun-2017 0.7692
31-Jul-2017 0.7987
31-Aug-2017 0.7898
29-Sep-2017 0.7839
31-Oct-2017 0.7673
30-Nov-2017 0.7585
29-Dec-2017 0.7800
31-Jan-2018 0.8073
28-Feb-2018 0.7792
29-Mar-2018 0.7665
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30-Apr-2018 0.7570
31-May-2018 0.7564
29-Jun-2018 0.7391
31-Jul-2018 0.7431
31-Aug-2018 0.7260
28-Sep-2018 0.7222
31-Oct-2018 0.7085
30-Nov-2018 0.7316
31-Dec-2018 0.7058
12