Financial Markets (Trading) report.

AUD/USD

Fig 1: AUD/USD

Figure 1 depicts the exchange rate between the Australian Dollar and US Dollar from September 2019 to September 2020. AUDUSD has been relatively stable through 2019, before suffering a plunge in March 2020 due to the pandemic outbreak. This pandemic affected Australia tremendously as Australia’s economy is heavily dependent on China and The United States, this caused many investors to flee. However, AUDUSD showed a v-shaped recovery after its trough in April.

(Historical Analysis)

Inflation rates

Supply of AUD decrease, Demand of AUD increase

Australia and the US inflation rate has always been maintained near its 2% target rate

In Q4, December 2019, AUD inflation rate was at 1.7%, in comparison to USD inflation rate at 2.3%, AUD inflation rate was relatively lower. This would mean that demand for exports will increase as AUD prices are more competitive in the world market now. Hence, this explains why there is a higher demand for AUD and the demand curve will shift right.

Imports will decrease due to overseas goods being relatively more expensive now in Australia’s domestic market. Hence, supply of AUD will decrease shifting the supply curve to the left.

Exchange Rate

Quantity of AUD

S2

D2

ER2

ER1

D1

S1

Interest rate comparison

US was holding a higher rate of interest in late 2019, implying higher capital inflow to AUD (Higher supply AUD, lower demand AUD)

In March, USD cut rates to 0.25, holding lower interest rates in comparison to AUD, explaining the recovery of AUDUSD in April due to capital inflow into AUD.

(Higher supply of USD, lower demand USD)

Since, Australia’s interest rates are higher more investors are more attracted to investing in AUD as they are more likely to benefit from investing in AUD due to the high interest rates which will explain why there is more demand for AUD and why the exchange has been stable throughout 2019.

Exchange Rate

Quantity of AUD

S2

D2

ER2

ER1

D1

S1

Commodity Price

Gold has been Australia’s major export consistently.

Gold prices has been appreciating since the start of the pandemic Peaking near 2000/ounce in USD.

This increases the value of Australian exports, resulting in an appreciation in GDP.

This increases the level of overseas investments, increasing demand for AUD

Due to the high demand for gold and gold mines might be used up which might lead to a decrease in supply.

Demand curve shift right, supply curve shifts left

Exchange Rate

Quantity of AUD

S2

D2

ER2

ER1

D1

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Forecast

Inflation Rates

Inflation for AUD is at -0.3%, in comparison to USD inflation rate of 1.3%. This means a lower price in AUD, encouraging investors to import more using AUD as it is cheaper and serves more benefits to the investors. Shifting demand curve right.

Lower PPP means its more expensive to import, causing supply of AUD to decrease as there will be lesser imports due to the higher prices (shift left)

Overall, AUD will appreciate against USD.

Exchange Rate

Quantity of AUD

S2

D2

ER2

ER1

D1

S1

Interest Rates

At the moment, interest rates for both AUD and USD are still held at 0.25, not affecting exchange rate. Which will explain the stability of AUD and this will ultimately attract more investors to invest in AUD as it will be less likely to fluctuate. This will increase their capital

inflow, increasing demand for AUD. Hence, causing AUD to strengthen against USD.

Exchange Rate

Quantity of AUD

S2

D2

ER2

ER1

D1

S1

Commodity Price (Gold)

As gold prices are expected to continue increasing, we can assume that GDP for AUD from exporting gold will increase and demand for AUD will continue to increase which will further boost AUD against USD

Exchange Rate

Quantity of AUD

S2

D2

ER2

ER1

D1

S1

Prediction

My stand is that AUD/USD will bullish as I predict that AUD will appreciate against USD in the following 6 months to come as all the above discussed determinants are all in favour towards AUD and the demand for AUD is likely to continue increasing.