US Interest Rate Hike and Australian Dollar
The Australian dollar has received a big boost from the Fed’s hike in dovish interest rate however; it could not keep it close to high for a very long time. AUD/USD has been creeping lower and this is might continue for a while. When the US Federal Reserve delivered the dovish interest rate hike, it increased the interest rates (Jones 2017). Apparently, when the market wanted to have the hint that monetary tightening could be on the way the USD dollar fell. This was considered as beneficial for Australian dollar at the same time the Australian dollar was even moving further from the peak of February.
The problems that have arisen for the Australian is that the hike in dovish interest rate has not provided Australian with the lasting support. Indeed, it had started to fall back down again. The AUD/USD continuous to be far above the low of 0.74889 noticed before the FED sent the greenback increasing. However, the AUD/ISD was also far below the peak of 0.7749 right after the greenback soaring (Evans, Gallagher and Martz 2015). The Australian should be content with the tightening Fed since the domestic central bank has expressed its worries and have often cited that tough currency would ultimately make things complicated to Australia’s crucial transition away from the dependence on the mining sector. The reserve bank of Australia cannot explicitly lay down its opinion that it does not requires a stronger currency however; it implies the every opportunity that gets its way.
The Australian dollar fall against the USD is not likely to change the picture. This is because majority of the economic data came from US included a second look on the fourth quarter Gross Domestic Product growth. The reserve bank of Australia has expressed their worries towards the price forth of housing sector (Chernov, Graveline and Zviadadze 2015). However, the reserve bank of Australia appears unwilling to employ monetary policy in order to combat during the time when the rate of inflation was low. The backdrop of interest rate signifies that the US rates will continue its upward rising trend whereas the Australian are anticipated to go nowhere else in the current year and possibly next year as well. The reserve bank of Australia has not said much about the currency backdrop. Nevertheless, more significantly, it has put worries concerning the stronger currency front and center in the last monetary policy conclave. This is not regarded as environment conducive situation for the Australian dollar against the USD. With that being said the picture however not even entirely gloomy.
Recent study has suggested that the Australian stocks has been on rise positively (Ow et al. 2016). The purchasers have been stimulated by the still-high prices for the nation’s main raw materials exports. A hopeful picture of greater demand from china has originated due to the large number of infrastructure projects are in progress, which includes the reformation of the economic zone in depressed provinces. According to the recent reports published by the Deutsche Bank it has been suggested that overseas investors have returned to Australian equity market in force that has led the offshore interest to outpace the local purchase for a change.
Housing Policy and Australian Dollar
As the things are currently though, it has been a bearish call. A low of 0.75 in month of March are considered as uncomfortably close for AUD/USD. The data obtained from the retail trade represents that the 47 per cent of the traders are net long with the ratio of traders short to long of 1.13 to 1. The number of net long for the traders as of march 2017 was 2.3% lower than the current month of April, which is 3.3 per cent lower than the last week of April (Helble, Prasetyo and Yoshino 2015). On the other hand, the number of traders net short is 4.6 per cent lower than the month of March and 13.7 per cent lower in the month of April. Typically a contrarian view is undertaken in relation to the crowd sentiments with the facts that traders net short reflects that AUD USD prices might continue to rise. As evident from the recent changes in the sentiments warns that the existing AUD USD price trend might quickly reverse lower despite of the fact that traders continue to remain net short.
Similar to interest rates, exchange rate also varies concerning the number of factors. Rise and fall in the rate of exchange can create both negative and positive impact. Depreciation is the term that is used to explain the decline in the value of the Australian dollar (Opie and Dark 2015). In the recent years, the Australian dollar have hovered at around US 70-75 cents. Depreciation reduces the value of dollar and this allows owners of foreign currency to purchase more Australian goods.
Depreciation results in making Australian export cheaper in the international market. The export cost increases due to the relative weakness of Australian currency. Considering this scenario the Australian business is regarded as more competitive internationally, which represents a positive sign for the economy however the consumers of Australia have to pay more for imported goods. Appreciation on the other hand in the Australian dollar have opposite impact (Fourel et al. 2015). This is because the competitiveness of the Australian export falls but the price of the import goods along with the overseas travel and foreign investment falls simultaneously, which ultimately benefits the consumers.
Like any other currency, the Australian Dollar plays a vital role in the development of economy and financial position. Imports and exports for both domestic and international investors are effected by and react to variation in the exchange rate (Kunkler and MacDonald 2016). The last year can viewed as relatively stable year for AUD. Currently one AUD can purchase 0.75 USD and the AUD has traded within 0.70 to 0.80 USD all over the year. The AUD is regarded as special among the major currencies since it belongs to the small group of commodity currencies. These currencies generally moves along the prices of the commodity along with the share of commodity based on the companies. Evolution mining that is regarded as the Australian based gold mining company and Qantas that burns jet fuels by importing planes in order to provide air transport service (Melvin and Shand 2016).
Commodity Prices and Australian Dollar
Growing prices of gold is regarded as good for Evolution mining whereas rising price of oil is considered bad for Qantas. As the prices of commodity moves with the Australian dollar, both the companies are impacted by the changes in the currency because of their exposure to the change in commodity prices. In other words, an appreciating Australian dollar is regarded as positive for evolution mining but bad for Qantas.
The currency link of commodities is viewed as less important for other firms that are exposed less to the commodity prices and they reflect more classical reaction to the exchange rate currency. Generally, when the AUD depreciates relative to USD it becomes more expensive to purchase. Conversely, it works the other way as well when the AUD rises it relatively becomes cheaper to import and Australian export becomes more expensive (Yong, Ngo and Lee 2015). The constant expansion of Latin American nations is most likely to increase the exposure of foreign exchange depending upon the correlation of the AUD currency within these regions and amid these regions. If the currencies are highly correlated, the foreign exchange exposure to the markets can be considered as significant.
The AUD /USD has added 9 points to the trade that stood 0.7237 as the commodities rallied. As stated by the Australian financial review comments from the governor of Australia has lashed on the financial markets especially for those that are at offshore. The governor has lashed out for effectively forcing the central bank in the wasteful official interest rate cut for the month of March in order to avoid being the victim to the erratically increasing global currency war (Lee, Ow and Ling 2014). The Australian AUD has lost more than 8 per cent against the USD during the last month even after employing the supporting factors. Similar to large number of currencies the AUD has come under renewed pressure of selling following the release of minutes by the US Federal. The Federal Reserve open market committee meeting in the month of April has stated that prospect of US hike in rate in the month of June is considered far greater than the many operating in the markets had expected.
A large number of participants have formed an opinion that if an incoming data is consistent with the growth of economy that is picking up in the second quarter, the labour market will continue to gain strength and the inflation will progress towards the committee objective of 2 per cent (Calin 2015). This will be viewed as appropriate for the committee to increase the target range for the federal funds rate during the month of June. Once the market has assumed that the future market prices is in the likelihood of June rate there could be an increase shot up of 30 per cent which is just over 15 per cent beforehand. The post minute slide witnessed that Australian dollar closed below the key technical point against the US cousin for the very first time ever since March 2.
Exchange Rates and Australian Dollar
The AUD/USD has closed in New York below the 200 day of moving average of 0.7260, which suggest that further near decline in AUD/USD are technically more likely to happen because the algorithmic and technical traders have added positions (Goddard, Kita and Wang 2015). According to the recent projections by the investments, banks have suggested that there should be no kind of let up in the Australian dollar for long-term decline as moving through the year 2017. Studies have stated that the Australian dollar has been trading lower ever since it last peaked in the year 2012 due to the height of boom in Chinese commodity. Every year it has been characterised by the lower highs and lower lows in the value of AUD currencies. Driving of the slump has represented a fall in the global commodity that has ensured that it acts as a key pillar in the valuation of currency that has slowly faded (Joshi et al. 2013).
The speed of currency decline has been moderated by the nation high rate of interest, which was maintained by the Australian central bank. Notably the basic interest rate was higher in comparison to the USA and the Eurozone ever since the global financial crisis. This has resulted in stable demand for the AUD since the looks to take the advantage of the country’s superior yield, which is known as the “carry trade”. However, analyst have stated the investors to anticipate this support to come under the pressure over the coming month of May. According to the survey, it is anticipated that Australian Dollar will endure its long-term lower trend (Nassirtoussi et al. 2014).
With risk moving towards growth and inflation on the back of growing possibility for financial stimulus in the US as it is believed that narrowing of interest rate differentials will be considered as more powerful headwind for the AUD than it has been in case of the current year. The inflation is anticipated to stay low which may exert pressure on Reserve Bank of Australia to ease further 50 bp. This must cut down the Australia’s advantage of interest rate and further cuts down one of the vital pillars of Australian dollar demand because the investors may stop sending the capital to Australia (Beatty and Liao 2014). Therefore, repatriation in the opposite direction might pick up. It is very much probable that the market will be more keen towards price in relation to the higher to rate of interest than it has been in past.
Analyst have expressed their opinion that Australian Dollar current poor run is most likely to extend in the month of May depending upon the present momentum, market trend and positioning (Freebairn 2015). The Australian dollar has tolerated weeks of selling against the US dollar which itself did not had any kind of stellar as of yet. Analyst have opined that the Australian currency will continue to remain in pressure during the coming weeks of May as markets have widened up their position on AUD. Latest data obtained from the CFTC proposes that speculative traders will continue to hold bets which will pursue towards profit on the rising Australian dollar (He and McCauley 2013).
Moving into the seasonally bearish month of May where AUS USD has recorded steep fall in 7 out of 10 May months during the past ten years. Odds are in favour of another loss in the month of May. As noted by the researchers May is regarded as good month for US Dollar and this ultimately adds to the weight of the possible downside of the AUD/USD. Based on seasonal basis it acts as a useful guide on measuring the future performance.
According to researchers, a potential resurgence in USD is anticipated in the month of May due to the strong seasonality factor. According to the researchers, it is believed that the events of risk lie ahead such as Australia’s Federal Budget on 9th May, which can lead to credit rating, being downgraded (Cusbert and Rohling 2013). On the other hand, it is not likely that Reserve Bank of Australia will express any appetite for raising the interest rates because the Australian inflation continues to underwhelm. For the second year in a row the inflation of Australia has missed out the anticipations in the month of April. The consumer price index headlined at 0.5 per q/q, which was considered as stable from the previous quarter. This was mostly driven by the housing sector, health, transport and education sector. On a yearly average the consumer price index have missed the median forecast of 2.2 per cent, which is still considered as the acceleration from the previous 1.5 per cent.
When the interest rates are higher, it will attract a higher influx of investor’s capital in pursuit of higher relative returns on their investment. The interest rate is above both in the 500 and 200-day moving averages representing a strong bullish sign (Stevens 2013). The next major level of resistance is the major multi-year trend line at around 1.8000 level. A break beyond the 1.7377 high would help in confirming a higher continuation with the next target of 1.7500.
The Australian dollar will not be able to resist the greenback push higher in the month of May. However, studies have suggested that the Australian dollar is not anticipated to fall as much as other currencies during the USD higher rampage. It is forecasted that the Australian commodity price will rise and it will lead to a rise in the aggregate demand for Australian dollar by the nations that are importing the Australian export. Interest rate is considered as the major driver of the value of currencies and the reserve bank of Australian is not likely to cut the interest rate lower.
Reference List:
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2), pp.339-383.
Calin, A.C., 2015. The impact of trade announcements on financial markets. an event study analysis. Romanian Journal of Economic Forecasting, 18(2), p.81.
Chernov, M., Graveline, J. and Zviadadze, I., 2015. Crash Risk in Currency Returns: Online Appendix Not intended for publication.
Cusbert, T. and Rohling, T., 2013. Currency Demand during the Global Financial Crisis: Evidence from Australia.
Evans, A., Gallagher, G. and Martz, A., 2015. Banknote Stakeholder Engagement. RBA Bulletin, September, pp.1-11.
Fourel, V., Rime, D., Sarno, L., Schmeling, M. and Verdelhan, A., 2015. Common Factors, Order Flows, and Exchange Rate Dynamics.
Freebairn, J., 2015. Mining booms and the exchange rate. Australian Journal of Agricultural and Resource Economics, 59(4), pp.533-548.
Goddard, J., Kita, A. and Wang, Q., 2015. Investor attention and FX market volatility. Journal of International Financial Markets, Institutions and Money, 38, pp.79-96.
He, D. and McCauley, R., 2013. Eurodollar banking and currency internationalization. In Investing in Asian Offshore Currency Markets (pp. 199-214). Palgrave Macmillan UK.
Helble, M.C., Prasetyo, A.D. and Yoshino, N., 2015. Hard Pegs versus Intermediate Currency Arrangements in the Pacific.
Jones, B.T., 2017. Currency Culture: Australian Identity and Nationalism in New South Wales before the Gold Rushes. Australian Historical Studies, 48(1), pp.68-85.
Joshi, M., Cahill, D., Sidhu, J. and Kansal, M., 2013. Intellectual capital and financial performance: an evaluation of the Australian financial sector. Journal of Intellectual Capital, 14(2), pp.264-285.
Kunkler, M. and MacDonald, R., 2016. Idiosyncratic variation of the US Dollar. Economics Letters, 144, pp.7-9.
Lee, Y., Ow, L.T.C. and Ling, D.N.C., 2014, May. Hidden markov models for forex trends prediction. In Information Science and Applications (ICISA), 2014 International Conference on (pp. 1-4). IEEE.
Melvin, M. and Shand, D.D., 2016. When Carry Goes Bad: The Magnitude, Causes, and Duration of Currency Carry Unwinds.
Nassirtoussi, A.K., Aghabozorgi, S., Wah, T.Y. and Ngo, D.C.L., 2014. Text mining for market prediction: A systematic review. Expert Systems with Applications, 41(16), pp.7653-7670.
Opie, W. and Dark, J., 2015. Currency Overlay for Global Equity Portfolios: Cross?Hedging and Base Currency. Journal of Futures Markets, 35(2), pp.186-200.
Ow, C., Tiong, L., Ngo, L., Chek, D. and Lee, Y., 2016. PREDICTION OF FOREX TREND MOVEMENT USING LINEAR REGRESSION LINE, TWO-STAGE OF MULTI-LAYER PERCEPTRON AND DYNAMIC TIME WARPING ALGORITHMS. Journal of Information & Communication Technology, 15(2).
Stevens, G., 2013. The Australian dollar: Thirty years of floating. Speech to the Australian Business Economists’ Annual Dinner, Sydney, 21.
Yong, Y.L., Ngo, D.C. and Lee, Y., 2015, June. Technical Indicators for Forex Forecasting: A Preliminary Study. In International Conference in Swarm Intelligence (pp. 87-97). Springer International Publishing.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
