BEA309 - International Finance: Exchange Rate Analysis AUD/USD & JPY

This essay provides an analysis of the AUD/USD and AUD/JPY exchange rates since 2019, focusing on the implications for Stellar Resources' lithium export plans. It examines the historical trends of these bilateral exchange rates, noting the depreciation of AUD against USD and the appreciation of AUD against JPY. The analysis considers the competitiveness of lithium exports to the US and Japanese markets, suggesting that exporting to the US would be more favorable due to the depreciating AUD. The essay also identifies key drivers of bilateral exchange rates, such as interest rate differentials and terms of trade, and their influence on the demand and supply of AUD. The conclusion recommends focusing on the US market while acknowledging the challenges in the Japanese market due to exchange rate dynamics. Desklib provides access to similar essays and study resources for students.

BEA309 INTERNATIONAL
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
Books and Journals......................................................................................................................7
Online..........................................................................................................................................7

INTRODUCTION
International finance is concerned with such monetary transactions that took place
between countries. Accordingly, major areas that the study pertaining to international finance
focuses involves currency exchange rates, foreign direct investment, etc. The present essay is
based on the discussion pertaining to the exchange rate movements in two bilateral exchange
rates that is, AUD/USD & AUD/JPY since 2019. With this, the expected performance of these
currencies in the upcoming two years would be explained to the management of Stellar
Resources who is going to expand its lithium operation by exporting to Japan & US. For this, all
the key drivers of bilateral exchange rate would be taken into account.
MAIN BODY
Australia follows the floating exchange rate system where the movement in AUD
exchange rate is determined through the supply of & demand for AUD in the foreign exchange
market. Several factors are there which affects the supply & demand of the currency in the
market where some have long run effects while some have short run effects on the currency
value like AUD.
Bilateral exchange rate described as the value one currency that is, AUD with regards to
the value of another currency like USD (Bahmani-Oskooee and Fariditavana, 2019). For
example, AUD/USD shows the value of AUD in relation to the USD which gives an idea of how
many USD are needed for buying one unit of AUD. If AUD/USD is 0.75, this means that 0.75
USD is needed to make the payment of 1AUD. With the increase in the value of AUD with
reference to another currency, this means appreciation of currency and in the event of reduction
in the value of AUD with reference to another currency, this means depreciation of currency.
The following is the chart showing appreciation and depreciation of AUD with reference to

another currency that is, USD and JPY.
Source: RBA Exchange rate historical data
The above figure shows that from 2019 to 2020, the USD required to buy one unit of
AUD has reduced to its lowest that is 0.61 which means the AUD is depreciated against USD
and from 2020 to 2021, this bilateral exchange rate has moved to its maximum which means that
the AUD has appreciated against USD and accordingly, more of the USD are required for
making the payment of 1 AUD (Kearns and Manners, 2018). Further in the subsequent period
from 2021 to 2022, this bilateral exchange rate is continuously fluctuating indicating the
downfall trends which means that currently, the AUD is depreciating against USD and
accordingly, less of the USD will be needed for buying one AUD. This conditions implied that if
this downfall trend would remain continued in the upcoming two years, where less USD needed

for the payment of 1 AUD, then the exports would be highly competitive in the global markets
because other nations would found the products & services offered by the domestic country as
cheaper. The corresponding imports of the domestic nation would become expensive.
In the given case of AUD/USD considering the management of Stellar Resources, it
could be said that with the continuation of trend of AUD depreciating against USD, the export of
lithium would be more competitive in the international market along with being cheaper for US
importers because they would require to pay less USD for buying AUD quoted lithium exported
by Stellar Resources (Ponomareva, Sheen and Wang, 2019).
Further, on looking at the second bilateral exchange rate that is, AUD/JPY, which has
reduced to its minimum from 2019 to 2020 at 67 while in the subsequent period from 2020 to
2022 (till today) it is showing increasing trend with a minor positive and negative fluctuations
taking place on monthly basis. This means that more of the JPY or Japanese Yen are required to
buy one unit of AUD which has increased from 67 in 2020 to 94 in 2022. Accordingly, importers
in Japan would require to make arrangement of more Japanese Yen for making payment of
1AUD.
Through this trend prevailing in the bilateral exchange rate that is AUD/JPY, it could be
expected that if this trend would remain continued in the upcoming two years, then the
requirement of JPY over 1 AUD would further increased and this led to imports becoming more
expensive for the importers in Japan (Işık, Radulescu and Fedajev, 2019).
With reference to the case of Stellar Resources, it could be said that the rising trend in
bilateral exchange rate between and AUD/JPY would lead to the export of lithium to Japanese
market more expensive. This will reduce the competitiveness of exporter that is, Stellar resources
and accordingly, there are very less probability of getting success in this market because there
must be other exporters in the international market who could provide the lithium at competitive
prices.
There are several key drivers of bilateral exchange rate where the first and the foremost is
interest rate differentials which depicts the differences between the interest rate in Australia &
other economies. If the rate in Australia will be high, then it leads to rise in investment in

Australia and accordingly, more capital will flow into the economy leading rise in exchange rate
and vice versa.
Terms of trade and the value of AUD have close relationship with each other. Terms of
trade is the ratio of export price to import price and with the rise in this ratio, AUD gets
appreciated and vice versa. It is the commodity price that affect the export prices in Australia and
movement in commodity prices cause movement in export price (Drivers of the Australian
Dollar Exchange Rate. 2022). Further, commodity price and terms of trade both affect the
economy of Australia through rise in investment. This is because when commodity price rises,
exporters take advantage of the same through expanding their production facilities to get
benefitted from higher export prices. The investment would deem to be financed through capital
flowing into Australia from other economies. This in turn, would leads to rise in demand for
AUD and accordingly, AUD would appreciate.
CONCLUSION
Through the above essay, it has identified that the export to US market would be a
successful proposal for Stellar resources while the export to Japanese market would not be a
successful proposal because of high and low competitiveness in these two market respectively.
Further, it has been identified that there are several drivers of bilateral exchange rate which
affects the demand for & supply of AUD and accordingly, the Australian bilateral exchange rate
fluctuates.

REFERENCES
Books and Journals
Bahmani-Oskooee, M. and Fariditavana, H., 2019. How sensitive are the US inpayments and
outpayments to real exchange rate changes: an asymmetry analysis. International
Economics and Economic Policy, 16(4), pp.619-647.
Işık, C., Radulescu, M. and Fedajev, A., 2019. The effects of exchange rate depreciations and
appreciations on the tourism trade balance: the case of Spain.
Kearns, J. and Manners, P., 2018. The impact of monetary policy on the exchange rate: A study
using intraday data. Seventh issue (December 2006) of the International Journal of
Central Banking.
Ponomareva, N., Sheen, J. and Wang, B. Z., 2019. Forecasting exchange rates using principal
components. Journal of International Financial Markets, Institutions and Money, 63,
p.101131.
Online
Drivers of the Australian Dollar Exchange Rate. 2022. [Online]. Available through <
https://www.rba.gov.au/education/resources/explainers/drivers-of-the-aud-exchange-rate.html>