Issues Touching the Australian Finances - Term Paper Example

Name: Institution: Professor: Course: Date: A. SUMMARY OF THE MAIN ISSUES DISCUSSED Rose Powell’s article discusses various issues touching on the Australian finances. The material is extracted from one of the latest financial reviews in the country for the year 2015. Powell’s article commences with the discussion of the falling of the price of commodities. The decline of the price commodities is shown to have various impacts on nations. Australia is one of the countries that have felt the effects of this fall. The article also predicts that the Australian dollar is expected to fall. The drop in the value of the dollar will lead to several impacts. The financial analysts that contributed to the prediction seem so confident on this fall (Powell, 2015). The article has also gone an extra mile to compare the economy of Australia to other countries. The economy of New Zealand and Canada. New Zealand and Canada are both similar to Australia in several aspects. The are all commodity-heavy economies. They hence face similar effects on the fall of prices of commodities. Powell’s article has also given much emphasis on the Australian dollar. The Australian dollar is predicted to keep losing value in the future. AUD has been compared to the US dollar. The financial analysts and the major banks predict the fall and the possible effects associated with this fall (Powell, 2015). B. DETERMINATION OF AUD IN THE FOREX MARKET Demand and supply is one of the most widely used models in the determination of exchange rates. The forex market is complex and complicated to understand sometimes. However, financial analysts and experts have come up with numerous models to determine successfully the exchange rates. The Australian dollar is always compared to the US dollar. The US dollar is the most common medium of comparison in the forex market. The forex market consist of numerous participants. All these members call for a standard medium to gauge themselves financially (Kumar, 2014 p.128). The demand and supply model enables easy determination of the exchange rates globally. That is why the model is widely used in the forex market. Determination of the exchange rate using this model requires the comparison of the price with quantity. When the supply is low, the price goes up. When the quantity is high, the price falls. The model, therefore, applies demand and supply as a measure of determining the exchange rates. The forex market consist of numerous participants. All these members sell and buy differently. The demand and supply at one period therefore are not the same during another period. History of the Australian dollar performance in the forex market reveals that the exchange rates vary annually. AUD exchange rates are high sometimes and at times lower. The variations in the AUD exchange rate is dependent on several factors (Thomson and Abbott, 2014 p.70). The first factor that lead to the fluctuation in the exchange rates is the interest rates. The financial reports in Australia reveal that there as been great fluctuations in the interests rates annually. Theses changes contribute a lot to the fluctuations in the exchange rates in the forex markets. When the interest rates are high, it leads to the increase in the exchange rates. When the interest rates keep on fluctuating, it leads to the fluctuations in the forex market. The second factor that leads to the variation is the rate of inflation. The rate of inflation is paramount for every participant in the forex market. The rate of increase significantly affects the demand and supply. Higher rates of inflation have been shown to be the cause of more fluctuations in the forex markets. The inflation rate should, therefore, be standard. Too many changes lead to adverse effects in the forex market (Kumar, 2014 p.130). Demand and supply are also affected by the country’s growth rate. The speed in which the economy of Australia grows has some impact on the forex market performance. When the growth rate is low, the economy of the nation is weak. Since the forex market is a global market, it is composed of various participant country's. The level of economy of all these participants is not the same. This therefore creates the fluctuations that are shown to exist in the markets. Government policies and intervention has an impact on the demand and supply. Government of Australia imposes taxes, trade restrictions and policies that affect the business . When these restrictions are too high to cope with the business, a lot of fluctuations are experienced. To minimize these fluctuations, all the factors explained must be controlled. Efficient management of factors such as inflation rates and the growth rate decreases the changes experienced in the forex markets (Singleton-Green, 2015 p.15). C. ANALYSIS OF THE MOVEMENT OF AUSTRALIAN DOLLAR The Reserve Bank of Australia provides very informative data on the relationship between the AUD and the US dollar. The performance of the Australian dollar is compared to the performance of the US dollar. The reason as to why the US dollar is used as the reference point because it is the most stable and performing in the forex market. The Reserve Bank of Australia and the graph provided in Powell’s article reveals a lot. The chart shows the movement of the AUD from January 15th to the end of July (Guthrie et al, 2013, p.5). The semi-annual report shows how the AUD has been moving and performing about the US Dollar. The graph also goes an extra mile to revealed the world commodity price movement during the semi-annual period. The world has been represented by the New Zealand, Canada and Britain. The first three months show a drop in the worldwide commodity prices toward -5. At the end of March, the performance of the Australian dollar is around -7. At this period, the world commodity prices vary slightly. Generally, there is a fall in the commodity prices worldwide. The performance of the Austrian dollar is therefore in line with the performance of Canada, new Zealand, and Britain (Lim, 2015 p.45). The graph reveals a greater variation in the last three months. This is the month of April, may, June and towards July. The currencies have taken various directions or movement with the US dollar. The New Zealand dollar is shown to have been the most to fall. At the end of June, its level ends at -16.29% when compared to the US dollar. The Canadian dollar and the Australian dollar ends at almost the same level of performance. They both end at around -10.00%. This means that the movement of both dollars with the US dollar is almost the same. The British pound ends at +3.48%. This means that it has a greater relationship when compared to the US dollar. The kind of behavior depicted by the Australian dollar is due to some external factors. These are the factors that contribute to the fall and rise of the prices of the commodity. The most notable factor is the terms of trade. Terms of trade play a very crucial role in this kind of behavior. When the terms of behavior are conducive enough, the prices of the commodities fall or remain constant. The business therefore experience minimal or fewer fluctuations in the markets. When the terms of trade are not conducive, the prices of commodities keep rising. This situation leads to the behaviour of the Australian dollar. The movement is not stable at all. Other factors that lead to the behavior of the Australian dollar are the same factors that lead to the fluctuations in the forex market. These factors include the interest rates and the growth rate (Singleton-Green, 2015 p.16) D. PREDICTING THE FUTURE OF THE AUSTRALIAN DOLLAR Powell’s article reveals that a prediction has been made by the principal fund manager BlackRock. BlackRock is a very renown bank. It plays a very crucial role in financial analysis and pieces of advice on monetary issues. The fund manager revealed that the Australian dollar is expected to slide US70¢ at the end of that year. Capital Economics backed up this prediction but with a slightly different forecast. Their forecast indicated that the Australian dollar is expected to fall to US65¢ by the end of the year 2016. BlackRock and Capital Economics are both great financial analysts. They both have equipped merchandise, tools and techniques to forecast on economic issues. Previous records of their economic predictions have been successful. I, therefore, agree with them that the Australian dollar will fall to US65¢ by the end of the year 2016. Rose Powell's article reveals the kind of movement of the Australian dollar in the graph. The movement is deviating towards -10% at the month of July. With this type of behavior, the chances of the fall to US65¢ is very realistic (Powell, 2015). The fall of the Australian dollar to US65¢ will be beneficial to the exporters in the country. Those involved in the exportation of food stuff and farm products will greatly benefit from this fall. Depreciation in the Australian dollar is a boost to the agricultural sector. Exporters will, therefore, export more products to the forex markets. This will lead to the increase in the income from the exportation. The fall will also be beneficial to the economy of the nation at large. It will bring about the rise of the economy. The increase in the economy of the country will be beneficial to all the major sectors such as agriculture, tourism, and mining. E. ACTIONS OF THE RESERVE BANK OF AUSTRALIA AND ITS EFFECTS Maintaining the market rate at US70¢ requires some actions from the Reserve Bank of Australia. These actions are aimed at maintaining the market rate. However, these actions will bear some effects. It is imperative to note that the participants in the global markets are not of the same level. It, therefore, calls for actions from the Reserve Bank of Australia. The most notable action that the bank can do is the creation of the demand for the Australian dollar. This is done through the process of selling or buying the Australian dollar against another dollar such as the US dollar. The bank can also create supply for the Australian dollar. In most cases, the bank also uses electronic agents in the forex market. They can place offers in the forex market to act as a communication to the participants (Lim, 2015 p.45). All these actions by the Reserve Bank of Australia have effects associated with them. Records of the previous actions by the bank reveal the side effects of such actions. The economy at times suffers greatly due to such actions. These actions contribute to the fluctuation in the exchange rates. The fluctuations in the exchange rates lead to the instability of the economy. The economy, therefore, cannot be stable hence a significant setback to all nation. Major sectors such as mining, agriculture and employment will suffer greatly on such adverse occasions (Singleton-Green, 2015 p.17). Actions by the Reserve Bank of Australia are very practical. The bank has experienced financial analysts and types of equipment that support their decision-making process. The kind of decisions they make on the actions to take are therefore very accurate. However, sometimes the decisions on the measures to be taken might not be effective. The effectiveness of these actions, therefore, depends on various factors. Many factors have to be considered in order to ensure that the actions taken are effective. Among the factors that need consideration include prices of commodities, the economy, and the forex markets. When all these factors are considered appropriately, all the actions that the Reserve Bank of Australia takes will be useful. Reference Powell, R. (2015). Australian dollar's next stop? US65¢ predicted as commodity prices decline. Retrieved September 24, 2015, from http://www.smh.com.au/business/markets/currencies/australian-dollars-next-stop-us65-predicted-as-commodity-prices-decline-20150717-gieiuk.html Singleton-Green, B. (2015). Commentary: Financial Reporting and Financial Stability: Causes and Effects. Australian Accounting Review, 15-17. Thomson, D., & Abbott, M. (2014).Banking regulation and market forces in Australia. International Review of Financial Analysis, 69-86. Kumar, R. (2014). Stock Markets, DerivativeS Markets, and Foreign Exchange Markets. Strategies of Banks and Other Financial Institutions, 125-164. Guthrie, J., Parker, L., & English, L. (2013).A Review of New Public Financial Management Change in Australia. Australian Accounting Review, 3-9. Lim, G. (2015). Foreign exchange Markets and the Australian Dollar. The Australian Economic Review Aust Econ Rev, 44-50. Reserve Bank of Australia. 2015. Retrieved September 24, 2015, from http://www.rba.gov.au/mkt-operations/ex-rate-rba-role-fx-mkt.html Read More