ECON910 Economics For Professionals - EXCHANGE RATE OF AUD/USD Research Report

Part a

In the given article the main issues related to depreciation of Australian Dollar against United States Dollar are highlighted. However, the main issues identified were as follows:

• Weak growth in China and Europe (especially Spain and Italy)
• Resurgence in demand for greenback
• Euro zone manufacturing industry orders fell down 
• Export demand weakened especially in Germany
• Firm’s work backlogs declined at faster rate since November 2014
• Deterioration in new orders and output growth
• Global manufacturing PMI fell to its lowest in over two years
• Output growth remained low, international trade flows deteriorated and employment slowed
• Business confidence dropped to its lowest level
• Chinese economy slowed that clogged the growth of credit market and cooled property market down. 

Source: (Moore, 2019)

Demand/Supply Model of Exchange Rate Determination:

An exchange rate signals the relative price of one currency in exchange of other (Hsing, 2015). For example, AUD-USD exchange rate would point out how many AUD to give up for buying one dollar. Hence, this exchange rate implies the price of a dollar in AUD (Garton, Gaudry, & Wilcox, 2016). The demand-supply model enables the policy makers for predicting the next period’s exchange rate. The changes in the exchange rate occurs when the factors that affect demand and supply conditions change. The graph below shows the initial exchange rate of AUD-USD at 0.70 per AUD.  

In the figure above, the descending curve is known as demand curve whereas the inclined curve is demonstrating the supply of Australian dollars. The current exchange rate is set at 70 cents where demand and supply curves are intersecting at E0. However, the increase in demand for AUD will increase the exchange rate from 70 cents to reach at new equilibrium E1 i.e. appreciation will incur. 

Factors Manipulating Exchange Rate

There are different factors that manipulates the exchange rate of AUD / USD. The factors as discussed in the literature includes fluctuations in inflation, interest rate, export & import, speculation, competition and level of government intervention. 

• According to Garton et al. (2016), lower inflation rate in Australia increases the exports due to which the demand for AUD will increase. As the demand rise, the AUD appreciates while affecting the exchange rate. 
• When interest rates in Australia increases, it attracts more investors to invest in the economy which increases the demand for AUD due to which appreciation incurs. Lower interest rates tend to result in depreciation.
• According to Hsing (2015), the exports and imports have direct link with the valuation of currency. Higher exports mean that the goods become cheaper causing depreciation to incur. Likewise, higher imports imply that the products become costly causing appreciation of AUD to incur. Hence, exports and imports influence the exchange rate of AUD. 
• Hsing (2015) also pointed that speculation of future value of AUD also affect the exchange rate. If it is expected that in future AUD will become costly, the consumers will demand more AUD at present causing the value of AUD to rise.
• Economic recession, government intervention and competition in the market also affects the equilibrium level of AUD exchange rate (Kim, 2015).