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Australian Dollar Forecast Essay

4214 words - 17 pages

Raashi Chawla

Australian Dollar Analysis


* The Australian Dollar is the currency of the Common Wealth of Australia, including Christmas Island, Cocos (Keeling) Islands and Norfolk Islands as well as the independent Pacific Island States of Kiribati, Nauru and Tuvalu. Within Australia it is almost always abbreviated with the dollar sign ($), with A$ sometimes used to distinguish it from other dollar-denominated currencies. It is subdivided into 100 cents.

* Prior to 1983, Australia maintained a fixed exchange rate. The first peg was between the Australian and British pounds, initially at par, and later at 0.8 GBP (16 shillings sterling). This reflected its ...view middle of the document...

Foreign-exchange traders commonly refer to the currency as the "Aussie."

Key Economic Indicators:

1. Gross Domestic Product and Real Net National Disposable Income:

According to the Australian Bureau of Statistics Australia’s GDP stood at AUD 1,318 billion in 2011 while Real Net Disposable Income stood at AUD 1,101 billion.

The dip in GDP as well as Real Net National Disposable Income in 2008 is due to the Real Estate bubble, while the US was its epicenter things unraveled in Australia as well. Many commentators were extolling the idea that Australia’s economy had “de-coupled” from the United States and Europe, and would continue to be powered by the rapid growth of China and other developing nations. Concerns about inflation meant that interest rates were rising and many felt Australia would escape the incipient economic slowdown in the developing world. Events had instead unfolded differently.

Property prices rose at a similar rate to the United States and ever since 2002-03 the Australian household savings rate has been negative. When it came to the second phase of the crisis, Australia was not so lucky. Many investors held securities with direct exposure to the ailing US sub-prime mortgage-backed market. Two prominent casualties were high-yield funds managed by Basis Capital and Absolute Capital. As the crisis shifted into the liquidity phase, the impact on Australia intensified. Institutions that were heavily reliant on financing, particularly from offshore, found it more and more expensive to refinance maturing debts. Among the companies caught in the crunch were Centro, MFS, ABC Learning and Allco. Of course the biggest institutional borrowers in Australia are the banks. They had come to rely increasingly on offshore markets in order to fund Australia’s growing borrowing habits. By 2007, Australia’s net foreign debt exceeded $500 billion, representing more than 50% of the country’s annual gross domestic product.

The above figure shows the major contributions to the 2.1% growth in GDP from September 2010 to September 2011. In seasonally adjusted terms, the main contributor to expenditure on GDP was Private gross fixed capital formation (2.1 percentage points) while Inventories (-0.8 percentage points) and Net exports (-0.6 percentage points) were the largest detractors. The main contributors to GDP were Construction (up 5.0%) and Mining (up 3.7%). Construction contributed 0.4 percentage points to the increase in GDP, while Mining contributed 0.3 percentage points.

2. Interest Rates:

The benchmark interest rate in Australia was last reported at 4.25 percent. In Australia, interest rates decisions are taken by the Reserve Bank of Australia's Board. The official interest rate is the cash rate. The cash rate is the rate charged on overnight loans between financial intermediaries, is determined in the money market as a result of the interaction of demand for and supply of overnight funds. From 1990 until 2010,...

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