Analyzing Exchange Rates and Economic Trends: A Deep Dive into RBA’s Observations and Strategies

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Answer a:

During the month of August, the RBA governor observed that there was some further amount

of depreciation that was likely to take place and was also necessary. This was stated in the

monthly board meeting statement that was concerned with the decline in the Australian dollar

when it came to adjusting the fall in the prices of the various commodities.

Instead of the decline of about 11% as against the US dollar during the year 2015, the

Australian dollar had already lost more than 7% of the basis of the trade weighted and this is

considered to be the most important measures for the global competitiveness of the country.

This is from the point of view of an exporter of goods such as iron ore and of the various

services such as tourism and higher education. When the currency of any country is weak,

then its exporters are even more competitive and it is more likely that the residents are more

likely to take the holidays at home and also avoid the imports that are expensive. This is the

fact that has resulted in the decline in the investment related with the mining along with the

commodity prices as in the end of the China led resources boom since the year 2012.

The official forecast of the bank still remains at the declined rate of US$65c by the end of the

year under consideration. This is also open to the review after the various Federal reserves

along was waited decision during the year of December and after that, there was a lift in the

rate of the interest for the first time in the decade long history.

Answer b:

The following are the factors that helps in determining the rate of exchange:

• Differentials in the inflation:if the country has a lower rate of inflation, then it just

shows that the country has an increased purchasing power when compared with the

currencies of the other countries. Also, during the last half of the century, there have

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been many countries that have received a lower inflation. The countries that have a

higher amount of inflation would usually encounter a lesser amount of depreciation in

the currency when compared with the currencies of the other trading partners.

• Differentials in the rates of interest: the interest rates, inflation and the rates of

exchange are very much related with one another. By the way of manipulating these

interest rates, the central banks goes on to exert some influence over the inflation and

the rate of exchange and also in the changes of the interest rates since that impacts the

inflation and the currency values. When the interest rates of any country are higher,

then that offers the lenders of that economy a higher rate of return when compared

with the returns offered to the other countries. Hence, the higher interest rates are able

to attract more foreign capital and also cause the rate of exchange to increase. The

impact of the higher interest rates would be mitigated and in case, the inflation of that

country is higher than the others, then in case if there are some of the additional

factors, then that would serve in to drive the currency somewhat down. And the

opposite takes place when there is a decline in the rate of the interests. Which means

lower rates of interest helps in decreasing the rate of exchange (RBA, 2016).

• Current account deficits: the current account is the balance of trade between the

country and its trading partners. This further reflects the payments made between the

countries for the goods and the services and the interests and the dividends. When

there is a deficit in the current account, then that would show an increased spending

on the foreign trade by the country rather than what it is earning. And also the

borrowed capital from the various foreign sources would make up for the deficit.

When the country requires that an increased amount of the foreign currency is being

used through the sale of the exports and also it supplies the own currency than its

foreigners, then the foreigners would demand more for their products. When there is

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an excess demand for the foreign current, then that would go on to lower down the

exchange rate of the country until the domestic goods and the services are cheap

enough for the foreigners and then the foreign assets are way too expensive when it

comes to generating sales for the domestic interests.

• Public debt:there are countries that are engaging in the large scale deficits for the

purposes of paying for the public sector projects and also for the government

funding’s. While there are many of the activities that stimulates the domestic

economy, there are nations that have a large amount of public deficits and their debts

are also less for the foreign investors. The main reason for the same is the fact that the

large debt encourages inflation and in case, the inflation is high, then that debt would

be service and also would be paid off with the cheaper real dollars in the near future.

In the worst case scenario, the government would print in the large debt and that

would increase the money supply that would cause the inflation. When the

government is able to service its deficit through the domestic, then that would help in

an increase in the supply of the varioussecurities for the purposes of selling the same

to the foreigners so that the prices are lowered. There is a large amount of debt that

would prove to be worrisome for the foreigners since they would believe that the

country may be defaulting in its risks. They would not be selling to use the securities

that have denominated in their currency in case there is a default in risk.

• Terms of the trade: this is the ratio that compares the export prices with the prices of

the imports, the terms of the trade are somewhat related with the current accounts and

the balance of the payments. In case, the prices of the exports of the country rises by a

greater rate than its imports, then its terms of the trade would have been improved by

much. That would result in the increase in the revenues from the exports that would

provide an increase in the demand for the currency of the country. In case, the price of

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the exports rises by a smaller %, than its imports, then the value of the currency would

decrease when compared with its trading partners.

• Stability and economic performance: the foreign investors would go in with the

strong economic performance in which they would invest their capital. The country

that has some positive attributes would also draw up the investment funds that would

be away from the other countries when it comes to political and economic risk. The

political turmoil would cause the loss of confidence in the currency and also

movement in the capital for more stable countries (CMSFX, 2016).

Answer c:

The following is the chart that analyses the movement of AUD relative to that of the US

dollar:

(Index mundi, 2016).

No, the change in the prices of the commodities is not in line with the change in the above

graph. The change in the prices of the commodities had increased and then are decreasing but

in the above chart, there is a decrease.

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The cause is the weaker Australian dollar due to lower interest rate. Also, the prices of the

commodities are expressed in US dollars, so which means that the investors are bidding up

the value of the greenback and so the commodity prices and the currencies adjust somewhat

accordingly (SMH, 2016).

Answer d:

The official forecast of the bank still remains at the declined rate of US$65c by the end of the

year under consideration. This is also open to the review after the various Federal reserves

along was waited decision during the year of December and after that, there was a lift in the

rate of the interest for the first time in the decade long history.

The advantage of the same would be for the exporters since they would earn more now when

they export their goods or render their services.

Answer e:

The following could be done:

• The government could sell its dollar reserves and purchase Australian dollar so that

the value of the US dollar decreases.

• The government could also borrow the foreign currency from abroad so that it could

buy Australian dollar from the forex market.

• When the interest rates are high, that causes the hot money flows and also an increase

in the demand for the other currency. So, the interest rates could be increased.

• The government must try to reduce inflation rate (Economics help, 2016).