Econ3511 | Financial Markets | Assessment Answers

You are required to provide some prediction on AUD/USD currency pair you have analysed for the next six months. You will have to state whether the foreign exchange rates value will go up or down.

The ideology of currency changes and differences across the globe has come up with concerns across the globe. Usually, investors and other international traders are in the question of whether their investment and business will make a profit or drive into larger losses in the next few months. Therefore, it has come to be a fundamental ideology to perform a market analysis that will help investors, creditors and international traders to make short-term predictions before venturing into business operations. This report is essential for businesses operating across the boundaries of the United States of America and Australia. Therefore, this report is set primarily to explain the likely changes that may occur in the AUD/USD currency for the next six months and their implications on business operations across the two countries.

Concerning the indicators that determine the changes in the exchange rates, the interest rate of a given country is a fundamental factor likely to affect the current trends between the AUD and the USD. Usually, interest rates affect the currency value of a given state in two primary ways.  Firstly, a drop in the interest rates of a country consequently leads to a similar fall in the value of the interest rates of that particular country. Additionally, a rise in the interest rates results into an increase in the currency value of that particular country. Often, the setting and execution of interest rates within a specific country is done primarily by the Central Bank of that particular nation (Forex-central.net, 2018). In this case, an economy with a higher interest rate is viewed to be economically stable thus lures a large number of investors (Nick, 2018). Currently, the Federal government of the United States of America has voted in support of a general 0.25% increment in the interest rates of the country (BBC, 2018). Otherwise, Australia has voted to maintain its interest rates at 1.5%. Comparing the two ideologies as viewed under the interest rates factor, we realize that the value of the USD is likely to rise in comparison to the value of the AUD. In such a case, it's advisable for the investors to invest more in the United States rather than in Australia in the next six more for the profit maximization of the companies. The diagram represented below displays interest trends between Australia and USA (Abc.net.au, 2018).

Secondly, the relative growth rate has been our keen area of concern in making speculations regarding the changes in the currency rates. In this case, we acknowledge the fact that the rate of growth of an economy has a great implication on the overall currency value. The current state of the US presents the implication of increment in the overall growth rate from a 4.1% value to a 4.2% value. Otherwise, Australia is systematically dropping its rate of growth as indicated in the second quarter of the 2018 fiscal year whereby the rate of growth dropped to 0.9% from a 1.1% value (Eikon, 2017). Therefore, the employment of the relative growth rate guidance, in this case, provides speculation that the USD currency is likely to increase when compared to the AUD currency. In other words, the AUD currency will depreciate in relation to the USD currency. In this case, investors and international traders are recommended to invest more in the USA for more profitability of their enterprises rather than spending in Australia.

The relative inflation rate is another key indicator that guides our speculations for the next six months of international operations between the USA and Australia. Inflation rate refers to the circumstance whereby the overall cost of goods and services within a country shifts higher (Mint.com, 2018). A rise in commodity prices within an economy can be at times advantageous and disadvantageous to the currency. Usually, the ideology of increasing prices is beneficial in an economy with rapid relative growth rate. The vice versa is correct such that inflation becomes disastrous to the currency of a lowly developing economy. Following the prices of the basket products, the inflation rate in Australia has increased to 2.24% in 2018 from a value equivalent to 1.25% in 2016.  Otherwise, the inflation rate in the USA is expected to decline after being constant at 2.1% in 2016 to 2018 (Eikon, 2017). In this case, the inflation rate of the countries can be misleading if other factors are not taken into consideration. The 2.1% is likely to make the USD currency to shift higher compared to the AUD because currently, the relative rate of growth in the US is higher than the relative rate of growth in Australia. Otherwise, we would have expected the Australian currency to appreciate against the USD had the relative rate of growth been kept constant.

Therefore, it's significant for the international marketers to take into consideration the likely changes in currency before investing their capital. In such a case, the traders minimize the risks and uncertainty while maximizing profitability. Conclusively, market analysis promotes more investment in the US compared to Australia.

References

Abc.net.au (2018). Will the Australian dollar gets crushed as US interest rates storm higher? Retrieved from: https://www.abc.net.au/news/2018-03-01/will-the-aussie-dollar-get-crushed-by-soaring-us-interest-rates/9492272 [Accessed on 30, September 2018].

BBC (2018). Federal Reserve raises interest rates. Retrieved from: https://www.bbc.com/news/business-44473148 [Accessed on 30, September 2018].

Eikon, T.R., 2017. Thomson Reuters ESG Scores.

Forex-central.net (2018). Interest rates and inflation: their impact on currencies. Retrieved from: https://www.forex-central.net/impact-of-interest-rates-inflation-on-currencies.php [Accessed on 30, September 2018].

Mint.com (2018). Four economic factors that can affect the value of your currency. Retrieved from: https://www.mint.com/vip-content/4-economic-factors-that-can-affect-the-value-of-your-currency [Accessed on 30, September 2018].

Nick K. Lioudis (2018). How do national interest rates affect a currency’s value and exchange rate? Retrieved from: https://www.investopedia.com/ask/answers/040315/how-do-changes-national-interest-rates-affect-currencys-value-and-exchange-rate.asp [Accessed on 30, September 2018].