Question

AUS/USD and AUS/JPY

Analyse what will happen to these exchange rates in the next 3-6 months. Based on the theory (use at least three), include relative interest rates, relative inflation rates, relative growth rates, government intervention and exchange rate expectation. You may also use other factors that may affect the exchange rate (e.g. commodity prices in the nation). In the analysis, if you have looked at a particular indicator, you must write why you believe that this indicator will cause a currency to appreciate or depreciate against another. Once have completed the analysis, must state clearly what you believe will happen to the currency pair of your choice.

Answer 1

COUNTRY	INTEREST RATE
Australia	1.5%
USA	2%
Japan	-0.1%

Higher interest rates are known to increase the value of the country's currency. It attracts foreign investments. This eventually leads to an increase in demand for the currency leading to a rise in the currency rate. Based on the above data we can see that the highest interest rates are in USA followed by Australia and Japan successively.

COUNTRY	INFLATION RATE
Australia	2.1%
USA	2.9%
Japan	0.9%

Rate of inflation also plays a major role in determining the currency value as higher the inflation, lower will be the currency value. Inflation rates are closely linked to interest rates. A country where interest rates are low offers higher consumer spending power and facilitates growth which causes demand to exceed supply leading to inflation. As the demand for a country's produce increases, the demand for its currency decreases, thus causing it to stengthen. Thus we can say that higher inflation rates can indirectly increase the value of the currency but does not seem to have a direct effect like interest rates. Based on the above data we can see that USA has the highest inflation rate followed by Australia and Japan successively.

COUNTRY	GDP
Australia	1%
USA	4.2%
Japan	0.5%

A high GDP is indicative of a robust economy and attracts investors leading to a demand for the currency. An expanding economy leads to consumer spending which is soon followed by inflation causing a government to increase the rate of interest in an effort to curb it. Thus we can say that higher GDP leads to strengthening of the country's currency. We can see from the above data that USA has a comparatively stronger GDP followed by Australia and Japan successively.

Some other factors that affect the value of a currency are Balance of Trade and Debt-GDP ratio.

COUNTRY	BALANCE OF TRADE
Australia	1347.39 Million US Dollars
USA	-46348 Million US Dollars
Japan	-2.082 Billion US Dollars

Balance of Trade is one of the most important factors that affect the value of a currency. This is because it has a direct effect on the demand and supply of a country's currency. A country’s trade account may be positive, negative or zero. A positive balance occurs when the country exports more than it imports. Conversely a negative balance occurs when a country imports more than it exports. This eventually leads to a shift in the demand or supply of the value of the currency of that particular country. From the above data we can see that the BOT of Australia is positive whereas that of USA and Japan is negative. Based on this fact we may say that AUD is stronger than USD and JPY.

COUNTRY	DEBT-GDP
Australia	41.9%
USA	105%
Japan	253%

Debt-GDP ratio is the measure of the nation’s debt in relation to its GDP (measured as units of currency). A high ratio indicated that the country uses more debt in order to produce more. Conversely a low ratio indicates that a country is able to produce more without adding on further debt. Based on the above data we can see that Australia has the lowest ratio followed by USA and Japan.

Putting all the above data into perspective we can say that the AUD appears to be the strongest currency amongst the three followed by USD and JPY.

Based on the above analysis,AUS/JPY appears to be the currency pair to trade as the above data indicates AUD to strengthen against JPY.