CASE STUDY: IS THE AUSTRALIAN DOLLAR OVERVALUED?

 Part A

For the circumstance examination of ‘Is the Australian dollar overstated?’ it has been discussed the nature of Australian dollar on transformation scale. This article includes a couple of issues which has an impact upon the nature of Australian dollar with the effect of transformation scale.

In this article, one issue is that swapping scale in a general sense remains high continually. In any case, it can decreasing or increase with the move of financing cost (Arvis et al. 2014). This impacts the country’s improvement rate and moreover the advancement comes about affecting both national pay and GDP.

Second issue found in this article is that Australian dollar has been higher of whole third of a penny when traded concurring the administrative head of RBA (Bacchetta and Van Wincoop, 2013). In any case, it has reduced on account of addition in the financing cost by US 76.3c. This has incited belittled Australian dollar to some degree.

Thirdly, it has been seen that usage of sensible impetus as opposed to trade weighted record has left Australian dollar to be thought little of imperceptibly (Beckmann and Czudaj, 2013).

Fourthly, as bank uses the document measure of trade weighted for Australian money to gage the fitting level, rising in return weighted record has ended up being greater than it was typical for terms of trade.

Fifthly, it has been recognized that if US Federal Reserve raises that rate of excitement for the year 2017 and if RBA does not do all things considered then it could provoke recalibration of Australian dollar (Bodenstein, Erceg and Guerrieri, 2017). This may make issue of underestimating in the economy of Australian.

Lastly, another issue has been found in the article that for AUD demand and trade battle isn’t suitable. This can make issue for the improvement of economy of Australia, its national wage and moreover GDP per capita.

Part B

With a particular ultimate objective to choose the accompanying preservationist time period’s transformation scale, use of intrigue and supply framework is an effective one. Change in swapping scale is being inspected by the help of intrigue and supply structure. According to Cashin et al. (2014), exchange rates are believed to be such rates that recommends cash’s relative cost. The ask for supply model of transformation scale affirmation captures that swapping scale that is to be determined position, changes due to advance in factors that generally speaking impact the modification in the condition of intrigue and supply. For choosing AUD to the extent forex exhibit, usage of this demand supply model of swapping scale confirmation is convincing. This model is flawless to separate the swapping scale that occurs in the dollar exhibit (Engel, 2013).

In the above figure, the dollar market of Australia has been recognized. The sum on the x-turn should be the measure of dollar that is accessible in the market. In the y-rotate, it should remain cost of dollar in cash which in this article is USD. Thusly, in this article the transformation scale is being figured the extent that swapping scale showed in euro-dollar (Engel, Mark and West 2015). In the above figure, both the demand and furthermore the supply twists shows the dollar’s demand and supply. The figure shows a fundamental concordance motivation behind change scale as 0.89 for every dollar.

There are numerous parts that effect the difference in premium and supply of dollars. Ceteris Paribus conditions are the one, which are connected with dollar’s demand and supply. In analyzing the reasonability of AUD in forex promote, these conditions or factors address the transformation scale that exists between two countries by strategies for trade. The components are:

  • Inflation rate
  • Interest rate
  • Growth rate
  • Government controls

Both swelling rate and improvement rate are by and large idea to be fruitful for trade related components. Repercussions of these rates urge the two countries to choose and take after a not too bad swapping scale. Change in the financing cost impacts the transformation scale too (Gabaix and Maggiori, 2015). Both the money rate changes which moreover incite either unequivocally or unfavorably change in transformation standard. Consequences of government confinement handles all the three rates, extension, excitement and likewise advancement, in this way dealing with the change scale similarly as AUD to choose it in forex exhibit.

Part C

The above outline contains advancement of AUD in regard to that of USD according to the transformation scale structure from the year 2014 to 2017. In the above diagram it has been seen that in 2014, the improvement of AUD regarding USD was 0.9035. In the mid 2014 to 2015, the AUD/USD transformation scale has extended to a more hoisted sum depicting the extent of 0.9454. It has reduced when entering 2015 of rate 0.7857. The AUD/USD transformation scale has changed at a higher rate amid the time 2016 and the begin of 2017. Nevertheless, in July 2017, the rate has extended slighter than that of prior year, 2016. After july, 2017 the transformation standard of AUD/USD has extended slighter than before of range 0.8121. From the above chart it can be seen that in the wake of growing to 0.8121 it has reduced again and till now it is 0.7755 which gives off an impression of being better that the condition in year 2016.

In return weighted record graph, it can be explored that in 2014, the document entirety was 69.4. Not long after starting now and into the foreseeable future, in that year just it has lessened to 67.4 which was not a suitable one for Australian economy. Amid the time 2015 and 2016, the trade weighted record remained fluctuating. Regardless, in the graph it can be seen that after January, 2017 it has started growing that to with a couple of high focuses and low focuses. After July 2017, it has extended to the level of 67.8 and again started reducing.

Part D

Amid the time spent conveying blended refreshments in United States, the exporter may get influenced because of misrepresented AUD on the wage. There are a couple of positive and also negative impact caused by the estimation of Australian dollar. At the period of overstated of AUD, tolls will be benefitted. This will help the exporters to place more in the remote market putting much highlight over improvement of the Australian economy to the extent trade (Gyntelberg et al. 2014). It has been recognized that in the situation of misrepresented; the exporters will be benefitted in two ways. The first is with a higher cash. This proposes each passage has had a remuneration rise. If the exporter who is conveying blended refreshments in United States from Australia needs to procure a more grounded dollar, the exporter needs to buy more imports from the remote country where the exporter is playing out the toll workplaces. Usage of this higher cash will benefit the exporter in its impacting stage (Manalo, Perera and Rees, 2015). The second preferred standpoint is rise in cash fall apart the weight over swelling. This happens as import costs gets diminish similar to Australian dollars. Along these lines, reduced level of inflationary weight licenses RBA in setting the rate of excitement at low level. Utilization of lower premium level in Australian dollar makes the exporter who is conveying blended refreshments in United States to secure some outside direct wander that assembles the compensation level of the exporter Cashin et al. (2014). Augmentation in wage of the exporter prompts responsibility towards the improvement of Australian economy.

Part E

In case the market rate is US 76C, RBA cuts this market rate and decrease it to US 72C. In order to do all things considered, RBA needs a couple of exercises or courses through which it can keep up the transformation scale that it has respected to do. These exercises or ways to deal with keep up the swapping scale are:

Use of specialist spares: RBA can buy money’s plenitude supply by offering out its hold of remote cash. This will move the demand upwards by pulling it upright which furthermore keeps up the change scale that it has regarded for, US 72C (Beckmann and Czudaj, 2013). If RBA analyze that nearness of wealth ask for is there, it will pitch some of its cash in order to buy another country’s money.

Indication of this movement: The issue with this action to Australian economy is that if RBA runs out all its remote cash stores to buy wealth supply of money, by then it won’t have the ability to direct future transformation scale.

Increasing the advance cost: RBA can pull in some budgetary endeavors from some extraordinary countries paying little respect to the country with which Australia is having trade association. This will incite increase looked for after of family unit cash at a higher rate (Arvis et al. 2014).

Indication of this movement: This may provoke occasion of withdraw in Australian economy which may incite contractionary cash related approach.

Imposing exchange control: Exchange controls are restriction on the amount of remote exchange that can be bought by neighborhood inhabitants of a country. This puts restriction on the surge of money from the country.

Indication of this action: Occurrence of misallocation of benefits in the country. It impacts the national compensation of the country. In this manner, lessen in the total GDP per capita happens. 

Reference list

Arvis, J. F., Saslavsky, D., Ojala, L., Shepherd, B., Busch, C., & Raj, A. (2014). Connecting to compete 2014: trade logistics in the global economy–the logistics performance index and its indicators.

Bacchetta, P., & Van Wincoop, E. (2013). On the unstable relationship between exchange rates and macroeconomic fundamentalsJournal of International Economics91(1), 18-26.

Beckmann, J., & Czudaj, R. (2013). Oil prices and effective dollar exchange rates. International Review of Economics & Finance27, 621-636.

Bodenstein, M., Erceg, C. J., & Guerrieri, L. (2017). The effects of foreign shocks when interest rates are at zero. Canadian Journal of Economics/Revue canadienne d’économique50(3), 660-684.

Cashin, P., Mohaddes, K., Raissi, M., & Raissi, M. (2014). The differential effects of oil demand and supply shocks on the global economy. Energy Economics44, 113-134.

Engel, C. (2013). Exchange rates and interest parity (No. w19336). National Bureau of Economic Research.

Engel, C., Mark, N. C., & West, K. D. (2015). Factor model forecasts of exchange rates. Econometric Reviews34(1-2), 32-55.

Gabaix, X., & Maggiori, M. (2015). International liquidity and exchange rate dynamics. The Quarterly Journal of Economics130(3), 1369-1420.

Gyntelberg, J., Loretan, M., Subhanij, T., & Chan, E. (2014). Exchange rate fluctuations and international portfolio rebalancing. Emerging Markets Review18, 34-44.

Manalo, J., Perera, D., & Rees, D. M. (2015). Exchange rate movements and the Australian economy. Economic Modelling47, 53-62.

 

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