Economic Analysis of AUD-USD Exchange Rate Fluctuations

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Economics for Professionals
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Table of Contents
Introduction:....................................................................................................................................3
a)......................................................................................................................................................4
b)......................................................................................................................................................6
c)......................................................................................................................................................7
d)......................................................................................................................................................8
e)......................................................................................................................................................9
Conclusion:....................................................................................................................................11
References......................................................................................................................................12
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Introduction:
The report is prepared so that economic issues can be analysed in the Australia. The report is
based on the article of the Australian dollar tumbles to ten year low, by reading that article the
issues will be analysed. Using the model of the demand and supply the exchange rates of the
AUD-USD is analysed. The factors that lead to the movement in the exchange rate of AUD-USD
is summarised by using the nominal exchange rate data from the RBI of Australia. In this report
with the help of the graph the driving factors are also discussed which helps in analysing the
impact of the demand and supply in the AUD-USD. The impact of depreciation AUD on the
Australian economy wills also be explained. The actions taken by the RBI is also explained on
the rate to US 70C and US 73C per AUD.
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a)
The main issues discussed in this article are that in the last ten years the Australian dollars has
tumbled below the US70. In the overnight the US70c was broken and the dollar tumbled in trade
which was falling low as US67.49c. The dollar currency was declined by 10 percent at the end of
the 2018. The major issue of declining the dollar was against the greenback and the low
manufacturing results in the China and the European Union.
The major reason behind the fluctuation in the AUD was the movement in the currency of
demand and supply in the foreign exchange market. If the demand for the Australian dollars will
increase, than the value will also rise and if the demand of the Australian dollars will decrease
than the value will also decline. The economic growth of the Australia is declining; the interests
are for the future is increasing. The global growth of the Australia is impacting as the people also
faced the problems with the wages. The Reserve Bank of Australia was failing to meet its
inflation rate target which was also the major issue (Reserve Bank of Australia, 2019).
Source: opentext.com
Figure: Exchange rates in Australia
Using the demand and supply model, there are many factors that helps in determine the USD
exchange rate which are stated below:
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Inflation and growth rate: The exchange rates get affected due to the change in the inflation rate
and growth rates as they are considered as the trade related factor (Comapremit, 2019).
Interest rate: The exchange rates are also get affected due to the change in the interest rate which
is the portfolio related factor. If there sit eh change in the one country of interest are than this
change can affect the attractiveness of dollars (Desjardins, 2019).
Government restrictions: Due to some government restrictions the exchange rate of dollar get
impacted (Comapremit, 2019).
Demand and supply model:
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b)
The above diagram depicts the pattern of exchange rate between USD and AUD. These two rates
are predominantly used across the globe or world. As such, these two currencies are considered
as universal currencies and are accepted in almost all the developed and non-developed
countries. To understand the pattern of exchange rate, there is a greater need to properly evaluate
the change in the movements of exchange rate. For this purpose, period of three years have been
considered started from the month of March 2016 to February 2019. The rates pertain to the
monthly rates for the given periods. In other words, period of 36 months has been covered and
thereafter linear graph has been prepared of the given set of data.
It has been observed that there is no unique pattern of the exchange rate between the two
currencies. Accordingly, the exchange rate is increasing or decreasing at some point of time. In
other words, there is no fixed pattern of increase or decrease in the exchange rate.
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c)
The main driving factors behind the recent movement of Australian dollar are explained as
under:
The Australian dollar has hit a low because of various factors. Out of which, the slowdown in
Germany is one of the factors. This slowdown in Germany led to a fall of whole Euro Zone
manufacturing and a fall in export demand. The new orders and output growth both have
declined which would result in slower production eventually resulting in a fall in employment.
The global manufacturing PMI also fell to its lowest level in December. As the output growth
remained really low, it led to a fall in new orders which ultimately resulted in falling if
international trade flows. All this led to a declining position of overall business confidence. The
Caixin and official manufacturing PMI for China fell which led to a further decline. The credit
growth is also slow and the real estate market is also not good which led to a vicious circle of
falling growth.
There was also a sharp decline in the euro and pound for copper and aluminium which effected
Australian dollar’s value. The decline in euro and dollar fell more than 2% for each. In Italy and
Spain, the demand for greenback is also low which is combined with a slow growth in China’s
economy. This all also led to a fall in Australian Dollar.
The way in which these factors affect the demand and supply of Australian dollar are many. For
example, the fall in production led to a fall in output. The fall in production and output would
lead to a fall in employment. When the employment is low, it would lead to a fall in income of
people. Secondly, when the output and production is low, the revenues suppliers also fall. All
these factors when combined together would lead to a decline in overall prosperity of the
country. There happens a lot of trade between China and Australia, a slowdown in the Chinese
economy led to less import and export between China and Australia. This led to a fall in
international trade which ultimately impacted Australia’s economy in a negative way.
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d)
As the fall in Australian dollar is huge, it impacted all sectors and all business in the economy.
The overall production, output, and employment fell. This also impacted the Australian exports
and also software exporters. As the value of Australian Dollar fell, the software exporters now
have to export their softwares at a lower price. This would result in lower incomes to the
exporters if the export quantity is not increased. The exporters will not earn enough revenues due
to a fall in Australian Dollar at the same quantity. However, if the quantity supplied is increased
it would lead to an increase in overall aggregate demand of software exports. If the quantity
supplied is not increased, the revenues will be low, the salaries paid to employees will also be
low. This would lead to an overall fall of the software export market. The exporters might be
forced to export the same quantity of softwares at a lower per software price. This would lead to
low profit margins of the software exporters. However, if the quantity supplied is increased then
more people will buy due to lower prices. This would result in increased aggregate demand.
The fall in the Australian Dollar led to an overall fall in the Australian economy. The low
production leads to a fall in employment (Econpomics help, 2019). The fall in employment leads
to a fall in overall household spending. As the household spending decreases the revenues of
firms selling for household also decrease (Econpomics help, 2019). This becomes a vicious trap
for the whole economy. In such a slowdown, as the prices of Australian dollar falls, the imports
would become expensive. A depreciation in the value of a currency results in increase in cost
push inflation. Also, the depreciation of domestic currency, would lead in demand pull inflation.
The imports would become expensive. This means that the quantity of imports would be low
resulting in higher inflation. Also, due to higher quantity of exports, the
current position of balance of payments and economic growth improves with the passage of time.
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e)
The Australian government can take the following steps in order to increase the value of their
currency from US 70 C per AUD to US 73 C AUD;
 Sell foreign exchange assets and buy their own currency
If the Australian government sold off its US government bonds such as the treasury bills and
brought back the proceeds from it to Australia then it would lead to depreciation in Dollar and
the Australian currency would appreciate. This will happen because the supply of Australian
Dollar would increase and the value of Australian dollar would be the resultant (Reserve Bank of
Australia, 2019).
 Increase in interest rates
When the banks and other financial institutions would increase their interest rates then it would
attract a lot of other countries to put their money in Australian banks. This would result in more
money flow in the country and the value of currency would increase (Pettinger, 2017).
However, a limitation of this method is that higher interest rates would lead to a slower
economic growth in the country.
Certain other measures listed below can also be adopted:
 Reduce inflation
If the prices of the goods are reduced then the demand would rise. In the long term, if a country
wants to increase the value of their currency then lower inflation is a good solution. Better
monetary and fiscal policies would lead to lower inflation in the country. However, reducing the
prices of goods and increasing the efficiency of production cannot be achieved overnight. The
improvement of quality of products and that too at reduced prices need conscious efforts from
the part of government and producers.
 Better productivity
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Increased and better quality production would lead to better growth of the firms which would
lead to increased value of currency in the long run. Better productivity at a low cost of
production would lead to good quality products at lower cost. This would help to increase the
attractiveness of Australian products not just domestically but internationally as well. Ultimately,
this would result in increasing the demand for Australian goods and increased value of
Australian dollar.
 Reduce wage inflation
The wage inflation in an economy must be reduced in order to bring up the value of Australian
Dollar as against US dollar. However, the limitation is that it is not an easy task to bring down
the wage inflation.
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Conclusion:
From the above report it is concluded that at the midnight only the dollars get declined up to 10%
due to many factors and issues which are stated in this report. In this report the factors are
determined by using the demand and supply model which affects the AUD-USD. The factors are
analysed in this report which contributes to the behaviour of the exchange rate. The report also
get summarised in driving the factors which are impacting the demand and supply in the AUD –
USD. In this report the impact of the Australian economy is explained which get impacted due to
the depreciation of the AUD. In this report impact on the business due to the falling prices of the
AUD were also explained. The side effect due to the change in the exchange rates for US 70c per
AUD to the 73c per AUD in the Australian economy was also explained.
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References
 Comapremit. 2019. 8 Key Factors that Affect Foreign Exchange Rates. [Online] Available at:
https://www.compareremit.com/money-transfer-guide/key-factors-affecting-currency-
exchange-rates/ [Accessed on:2nd april 2019]
 Desjardins. J., 2018. The 6 Factors That Influence Exchange Rates. [Online] Visual
Capitalist. Available at: https://www.visualcapitalist.com/6-factors-that-influence-exchange-
rates/ [Accessed on: 2nd april 2019]
 Econpomics help. 2019. Advantages and disadvantages of devaluation. [Online] Econpomics
help. Available at: https://www.economicshelp.org/blog/1299/economics/advantages-and-
disadvantages-of-devaluation/ [Accessed on: 2nd April 2019]
 Econpomics help. 2019. Economic effect of a devaluation of the currency. [Online]
Econpomics help. Available at:
https://www.economicshelp.org/macroeconomics/exchangerate/effects-devaluation/
[Accessed on: 2nd april 2019] Pettinger. T., 2017. How to increase the value of a currency. [Online] Economics help.
Available at: https://www.economicshelp.org/blog/4819/currency/how-to-increase-the-value-
of-currency/ [Accessed on: 2nd April 2019]
 Reserve Bank of Australia. 2019. Exchange Rates and their Measurement. [Online] Reserve
Bank of Australia. Available at:
https://www.rba.gov.au/education/resources/explainers/exchange-rates-and-their-
measurement.html [Accessed on: 2nd April 2019]
 Reserve Bank of Australia. 2019. The Exchange Rate and the Reserve Bank's Role in the
Foreign Exchange Market. [Online] Reserve Bank of Australia. Available at:
https://www.rba.gov.au/mkt-operations/ex-rate-rba-role-fx-mkt.html [Accessed on:2nd april
2019] Singh. J., 2019. 4 Ways to Determine the Rate of Foreign Exchange. [Online] Economics
discussion. Available at: http://www.economicsdiscussion.net/foreign-exchange/4-ways-to-
determine-the-rate-of-foreign-exchange/633 [Accessed on: 2nd April 2019]
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