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Australian and US dollar: Movements

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Summarize the movements in the exchange rate of the Australian dollar against the US dollar over the last 36 months. Using appropriate models, explain the various factors which have caused these movements. Considering current national and international economic conditions, critically discuss the impacts of the overall exchange rate outcome on the Australian economy and its implications for monetary and fiscal policies.

Helpful Tips:

A useful source of information is the Australian Financial Review. This newspaper publishes articles on the fluctuations in the exchange rate almost daily. A prime source of information is, of course, the Reserve Bank of Australia. In analyzing the impacts of the rising dollar on the Australian economy, you should be familiar with the challenges it is currently facing. As a starting point, read the article: "Cuts won't stave off a recession" (The Australian July 2, 2013). Although this article (attached) discusses mainly the recent RBA's interest rate decision, it provides a good snapshot of our current economic issues.

Show evidence (by quotations and/or references/in-text referencing) of wide reading. While the work is to be presented as an essay it is expected that appropriate use will be made of chosen diagrams and tables which enable you to concisely demonstrate your line of reasoning.

Title of Essay should indicate what you are trying to argue.
Word Limit: 1200
Please include references.

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On November 07, 2010 for the first time the Australian Dollar breached the $1.00 mark. This was a strong recovery from the $0.83 in June 2010. There are several factors that accounted for this increase in the value of Australian Dollar. The economic recovery had gained momentum. This was supported by significant increases in commodity prices, stronger corporate profitability, higher wage growth and strong corporate profitability. Private domestic demand fuelled economic recovery. Also at that time the US was still affected by the recession. Its GDP growth rate was weak (1). Under these circumstances the value of the Australian Dollar increased vis-à-vis the US dollar.
In 2011, the Australian Dollar reached $1.09 on July 31st, 2011. However, on October 9th, 2011, the Australian Dollar dropped to $0.965. The increase in the value of the Australian Dollar up to July 31st, 2011 is attributable to global economic recovery. The strong economic growth in Asia had increased the demand for Australian resources exports, and improved the Australian terms of trade of record highs. The boom was restricted to be concentrated in sectors related to the resource boom and in sectors of the service sector. The strong Australian dollar was expected to hurt manufacturing and trade exposed sectors. The drop in the Australian Dollar is attributable to high uncertainty and volatile economic environment. Even though the terms of trade remained favorable, the Australian Dollar declined because of increased uncertainty in the global economic outlook, weak consumer, and business confidence (2). The high exchange rate of Australian Dollar inhibited exports and led to strong competition from cheap Asian produced substitutes. Even the overall employment in Australia began to decline in full time jobs.
In 2012 February, the foreign exchange rate was $1.076 on February 27, and later the exchange rate dipped to $0.97 on June 3, 2012. The increase in the foreign exchange rate of ...

Solution Summary

Exchange rate between Australian and US dollar is explained in a structured manner in this response. The answer includes references used.

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PCFt = a0 + a1et + mt

where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:

Currency Regression Coefficient (a 1)
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The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
All of the above are true.

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