Impact of COVID-19 on the Value of AUD

This essay explores the impact of COVID-19 on the value of AUD and analyzes whether it will appreciate or depreciate in the next 2 years. It discusses the factors affecting the exchange rate market and the volatility caused by the pandemic.

INTERNATIONAL FINANCE
ASSIGNMENT 1
IMPACT OF COVID-19 ON THE VALUE OF AUD
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Name – Tricia
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Name – Kalik
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INDEX
ABSTRACT
The Covid-19 pandemic had a huge impact on individuals and countries around the globe.
There was a lot of uncertainty about the effects of virus worldwide and till today, there is no
end date of the virus. The virus bought with it a worldwide lockdown where most of the
countries closed their borders and did not allow anyone to go in and out. This had a major
impact on the economies worldwide and impacted the exchange rate of different countries.
Exchange rates depends upon several factors such as the exchange rate, inflation rate,
economic and political standing, fiscal and monitary policies etc. Events such as wars,
political unrest, pandemic etc can have a major impact on the exchange rate market and can
make it volatile. Covid-19 bought a few challenges for the entire globe. This essay aims to
understand the impact of covid-19 on the value of AUD and trying to estimate whether the
AUD will appreciate or depreciate in the next 2 years.
INTRODUCTION
Foreign Exchange Market is a global marketplace for buying and selling different currencies
around the world. Exchange rates of any currency are very volatile and depends upon a
number of factors such as the political and economic situation of the country, its inflation and
interest rate, any natural or man-made disasters etc. They are very sensitive to enormous
shocks such as oil prices, political decisions, war and natural disasters. A pandemic as big as
covid-19 surely had a great impact on the foreign exchange market’s volatility.
Covid-19 pandemic spread like a wildfire across the world and had a long-lasting impact on
life of each individual around the globe. It resulted in lots of businesses around the world to
shut down, countries imposing lockdowns and masks being made mandatory in many parts of
the world. Due to lockdowns, individuals were encouraged to stay at home and to compensate
for that, the governments around the world had to spend a huge amount of money on stimulus
checks, unemployment benefits and injecting capital in the economy. Lockdowns also meant
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that there was restricted international trade and travel which impacted economies of countries
highly dependent on imported goods. Also, since the foreign exchange market also works on
the principle of supply and demand, the above stated factors resulted in volatility in the forex
market.
Overall, COVID has managed to affect several of the main sources of exchange rate
fluctuation, such as “interest rates, inflation rates, government debt, political stability, export
or import activities, recession and speculation” (Corporate Finance Institution, nd). The
currency of each country was impacted differently due to their different political and
economic policies to deal with covid-19. Some countries tried to downplay the virus and did
not close their borders and they were faced with a surging number of cases which impacted
their economies. Some countries tried to take drastic steps by closing their borders and
imposing strict lockdowns which helped in controlling the spread of the virus. Australia had a
serious outlook towards the virus and closed its borders and imposed strict lockdown in covid
infected areas which helped the country to better manage the virus. And even though the
Australian dollar lost value initially due to the fear and uncertainty of the virus, it was able to
stay stable because of different factors which would be further discussed in the essay.
ANALYSIS
Covid-19 has forced the world to adopt to strict and harsh measures to control the spread of
the virus, this has led to economic uncertainty. Macroeconomic uncertainty increases the
volatility in the Forex and other markets (Arif, Saeed et al. 2021, p.1). The most significant
factors of exchange rate, supply and demand, drive the foreign exchange market, just like
they do in every other market. These changes in several nations have an effect on the foreign
global market as well. Several of the primary drivers of exchange rate volatility, including
interest rates, inflation, government debt, political stability, export or import activity,
recession, and speculation, have been impacted by COVID. Therefore, it is crucial to
establish the true significance of each element as well as how much of the stated volatility
was actually caused by the pandemic. Each nation had different effects during this period,
and their responses were determined by their political and economic actions. (Salim 2022).
Forecasts made prior to the coronavirus indicated that real gross domestic product (GDP)
growth rates will rise by 2.9 percent in 2020. However, as per IBIS World, real output
decreased by 3.6% as a result of COVID-19. More than 130 million individuals worldwide
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have been added to the "poor" class as a result of job losses and increased unemployment,
which has also caused major changes in people's income categories.
THE ECONOMIC AND FINANCIAL EVENTS ASSOCIATED WITH THE
OCCURRENCE OF THE COVID-19 PANDEMIC
 SUPPLY CHAIN INDUSTRY
The Australian Bureau of Statistics recorded a 48% increase in operational limitations in
Australia. In most areas of manufacturing and supply, Covid-19 has disrupted activity and
had the expected impact on the supply chain. Data from August 2021 showed that the hardest
hit industries were the shipping, postal, and warehousing sectors. The supply chain was
significantly strained as a result. There has been reduced demand on supply chains as a result
of the recession in the global economy's impact on industry and retail, which has prevented
many from restarting with high levels of efficiency. In the end, however, the service industry
and supply chains will employ technological solutions like AI, digital platforms, advanced
analytics, and big data to create new ways of working. (3)
In addition to many other things, operators involved with supply chain have been able to
assist clients by finding new manufacturers, creating more effective distribution paths, and
adopting last-mile logistics to send goods to their final destination as quickly as possible. As
a result, it is expected that industry revenue would grow at an annualised rate of 3.4% to
$10.2 billion. The industry profit, calculated as earnings before interest and taxes, grew from
6.3% in 2017 to 9.5% in 2022, including a rise of 4.4% in 2022 alone, as industry operators
were able to raise their service costs to pre-pandemic levels. (3). However, things are looking
up in this industry as we have not only mended the pandemic effects but have discovered new
ways of delivering products and services.
 GOLD ORE MINING INDUSTRY
As per IBIS World, Australia and the UK and India each have free trade agreements (FTAs)
in place. The free trade agreement between Australia and the UK was struck in late 2021, and
both parliaments are expected to ratify it before it takes effect in early 2023. The Australia-
India Economic Cooperation and Trade Agreement was signed by Indian and Australian
authorities in April 2022. India and the UK both serve as important export markets for
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Australian businesses and FTAs, and both are expected to increase Australian export activity.
This will immensely help Australia with be a strong player in the Foreign exchange market,
therefore leading to an appreciation in its currency value. Global economic growth is
inversely correlated with gold demand worldwide. People always look to gold as a store of
value since early on, especially when there is political unrest and slow economic progress.
Thus, a higher global GDP growth rate could endanger industry expansion by reducing gold
demand growth. Over 2021–2022, the performance of the world economy is predicted to
improve.
The Australian dollar returns that local gold ore producers receive are directly impacted by
the US Dollar to Australian dollar exchange rate. A weaker Australian currency or a
depreciation might benefit the sector by lowering export market prices, which boosts demand.
A weaker Australian currency also drives up domestic gold prices since gold is priced in US
dollars, which benefits the industry if volumes remain stable or rise. In 2021–2022, it is
anticipated that the Australian dollar would lose value relative to the US dollar.
(IBISWORLD)
 ACCOMODATION AND FOOD SERVICES INDUSTRY
Underemployment reached a historic high of 13.8% in April 2020. The payroll jobs in the
hospitality industry were severely impacted (-35%). All states, with the exception of
Victoria, which saw a second COVID-19 wave and lockdown, showed signs of economic and
employment recovery by August. Due to COVID-19, 72% of enterprises reported lower
revenue, which could have contributed to increased unemployment. The unemployment rate
reached its highest point in more than 20 years in July 2020, peaking at 7.5%.
In the country, job openings made up 93% of the lost positions, and growth in the economy
was 3.4%. While this was excellent news for some businesses, job losses in other sectors
persisted into November 2020. The number of people wanting to eat at restaurants or stay in
hotels has drastically decreased, and this is due in part to the justified fear of contracting
COVID-19. With many businesses already in bankruptcy, the industry is in a dreadful
position on a global scale. (3)
The Australian government has loosened the rules for incoming travel as of July 2022,
largely by removing the need for travellers to Australia to undergo tests and receive
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vaccinations. Reduced travel regulations will probably encourage more people to visit
Australia, which will be advantageous for the many different companies that benefit from
international tourism. (IBIS).
Because of the industry's anticipated expansion in revenue and profit, it is expected that
international hotel corporations would keep making investments in the local market. For
instance, over the next five years, Marriott International also intends to build new hotels in
Melbourne and Tasmania, and the UK-based InterContinental Hotels Group intends to
expand the domestic reach of its upscale Hotel Indigo brand. Considering that Tourism
Research Australia anticipates a substantial increase in international travel, particularly from
Asian markets, additional hotels and resorts will probably be built during this time. The
number of industry establishments is therefore expected to rise over the following five years.
(IBIS)
IBIS World says that the sector is still being held back by lingering concerns over COVID-19
and the global recession. Over the next five years, the Australian dollar is expected to
appreciate in value but stay weak. (ibis) On the bright side, it is anticipated that the poor
value of the dollar will promote inbound travel, increasing demand for accommodation
industry.
 AIRLINE INDUSTRY
Prior to COVID 19, the Services sector made the largest contribution to the global GDP,
according to Statista. The full effects of the economic slump have been felt across a wide
range of industries, but COVID-19 has had a particularly negative effect on the travel and
tourism sector. Airlines have seen an unusual decline in passengers, and nations and regions
that depend heavily on tourism have seen significant job and revenue losses as per Statista.
International and Domestic Airlines in Australia in particular has been most hit by Covid-19
as per data retrieved from IBIS World. Revenue and Employment growth also saw a strong
decline. The Tourism industry in conjunction with the airline industry hit an all-time low.
The next five years are expected to see a recovery in the aviation sector. Before conditions
revert to pre-pandemic levels, it will likely take some time. An otherwise robust rebound is
expected to be slowed by the COVID-19 pandemic's continuing effects on international
tourist travel as well as the capacity cutbacks of several key operators, particularly the
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airlines. Over the next five years, investment is anticipated to increase across the industry due
to drastically better market circumstances. The five-year period from 2026–2027 is expected
to have an annualised 5.7% increase in industry sales, reaching $115.4 billion. According to
our analysis, Covid 19 did have an impact on the airline business, notably the services sector,
but demand is causing the airline industry to recover. Thus, we suspect a decline in AUD to
generate more revenue.
SPECULATION
1. INFLATION DIFFERENTIALS
As per the above Consumer Price Index (CPI) graph from Australian Bureau of Statistics, the
inflation rate is on a steady rise. According to the Australian Bureau of Statistics' (ABS)
above Consumer Price Index (CPI) graph, inflation is steadily increasing. Higher inflation
means higher prices for goods and services. Since goods and services in Australia become
more expensive relative to goods and services of other economies, the demand for them
decreases. This directly impacts the demand for the Australian dollar. Also, due to the
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increase in prices, the supply of the currency goes up. This rise in supply for AUD and
subsequent decline in demand results in the depreciation of AUD. Since a currency's
purchasing power falls in relation to other currencies, high inflation rates often show an
increase in the value of the currency. The current inflation rate of almost 6.8% is one major
reason for the current decline of the currency in the forex market.
2. INTEREST RATE
During COVID 19, interest rates as reported by the Reserve Bank of Australia (RBA)
dropped. Nevertheless, it is steadily rising. Higher interest rates give lenders in an economy a
better return than in other economies, luring in foreign investment and driving up the
currency rate. This results in more investors holding on to Australian assets which means
more money flows in Australia and less money flows out of it. The subsequent increase in
demand for AUD results in its appreciation in the foreign exchange market. Higher interest
rates have a lessened effect.
Since interest rates, inflation, and currency rates are all related, they are all steadily rising in
Australia. The interest rate is expected to rise to a peak of 3.35%. In the upcoming years, we
anticipate that the value of the AUD will appreciate steadily.
3. CURRENT ACCOUNT DEFICIT
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According to the RBA's June Reports, the current account is in deficit, which means that the
country is borrowing money from overseas sources to cover the deficit since it is spending
more on foreign trade than it is generating. As local goods and services become affordable
enough for foreign customers and foreign assets become too expensive to produce revenue
for domestic interests, the country's exchange rate declines as a result of the excessive
demand for foreign money.
4. INTERNATIONAL TRADE
When goods are exported out of Australia, the exporter has to pay the amount in AUD which
results in increase in demand for the currency and hence the currency appreciates. Similarly,
when goods are imported in Australia, the importer has to exchange AUD for other currency.
This results in increase in supply of AUD and the currency depreciates.
Strict entry requirements resulted in low international trade during the pandemic which
resulted in the initial depreciation of the currency but with things getting back to pre-
pandemic levels, the AUD is expected to appreciate in future.
CONCLUSION
Covid-19 is going to have a prolonged effect on economies around the globe because of its
uncertainty. It has no definite end date and since it is a newly discovered strain of virus,
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medical professionals are still trying to understand its effects and how to contain its spread.
Covid 19 has been successful in affecting the drivers of exchange rate volatility such as
interest rate, inflation, tourism etc.
A lot of major Australian industries were impacted during Covid-19. Because of the early
lockdowns and restrictions, the supply chain and service industry were hit the hardest. The
hospitality industry also saw a lot of shutdowns and employees losing their jobs which
resulted in the country seeing its highest unemployment rate in decades. In the early 2022,
Australia has started to loosen its strict entry requirements and these industries are seeing a
growth in their numbers back to pre-pandemic levels.
Several major drivers of AUD were affected during the pandemic outbreak. The interest rates
had to be cut down and the tourism and international trade faced a huge blow due to Australia
closing down its borders which directly impacted the value of AUD. There was a sudden
decline in AUD during the initial stage of the pandemic due to the fear and uncertainty
associated with the virus. The government introduced stringent lockdowns and stimulus
policies to keep the spread of virus at a minimum. Australia was able to control the outbreak
during the initial stage due to these measures. In 2022, Australia reopened its borders, and
this has resulted in things getting back to their pre-pandemic stage. With things getting back
to normal, the AUD is expected to rise within the next two years.
REFERENCES
Arif, A., et al. 2021, ‘The behaviour of forex market during the first and second wave of
COVID-19: a wavelet analysis.’ Applied economics letters ahead-of-print(ahead-of-print): 1-
5.
Salim, I 2022, ‘COVID-19 and the Foreign Exchange Market: An Analysis of the Pandemic’s
Effect on Exchange Rates’, Gerogeia Southern College Theses. 770,
<https://digitalcommons.georgiasouthern.edu/honors-theses/770>
https://www.emerald.com/insight/content/doi/10.1108/SD-12-2021-0174/full/pdf?
title=the-new-normal-adapting-to-live-after-covid-in-supply-chain-management (3)
RBA 2022, ‘Interest Rates’, Reserve Bank of Australia, accessed on 29th September 2022,
<https://www.rba.gov.au/chart-pack/interest-rates.html>
RBA 2022, ‘Bulletin 2022’, Reserve Bank of Australia, accessed on 29th September 2022,
<https://www.rba.gov.au/publications/bulletin/2022/jun/pdf/bulletin-2022-06.pdf >
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IBIS WORLD
https://www-statista-com.eu1.proxy.openathens.net/topics/5994/the-coronavirus-disease-
covid-19-outbreak/#dossierKeyfigures
Corporate Finance Institute nd, ‘Exchange Rate - Overview, How It Works,
Importance’, Corporate Finance Institute, accessed on 25 September 2022,
<https://corporatefinanceinstitute.com/resources/knowledge/economics/exchange-rate/>
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