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Interest Exchange Rate Essay

3735 words - 15 pages

Executive Summary
It is important for companies and investors to have a firm understanding on the forces driving exchange rate changes as these would affect investment and financing opportunities.
This report analyzes the movements of three currencies, Australian Dollar (AUD), Icelandic Krona (ISK), and Indian Rupee (INR) against US dollar, and suggests events that may cause the violations of three chosen currencies. Analysis shows that factors including but not limited to inflation rates, interest rate differences, foreign investment as well as demand and supply of domestic currency are highly correlated with exchange rate changes in chosen currencies.
Based on the analysis, Purchasing ...view middle of the document...

0 Introduction
The aim of this report is to provide an analysis on the chosen exchange rates in relation to the given questions. Analysis on the specific rates is based on a 5-year period from 2006 to 2010.
2.0 Question 1
2.1 AUD/USD

Figure 1 Exchange Rate of AUD/USD Over Five Years
Data sources: http://www.rba.gov.au/statistics/cash-rate.html
The last five years of data from the Reserve Bank of Australia (RBA) is analyzed to show the movement of AUD. Figure 1 shows the fluctuant appreciation of the AUD from 2006 to 2010. The AUD appreciated from January 2006 until July 2008 where it depreciated due to the world wide recession. Figure 2 shows that AUD depreciated to its lowest in October 2008 by almost 15%. However, the AUD bounced back with America acting on the economy to resolve the crisis in March 2009.

Figure 2 Percentage Change of AUD/USD Exchange Rate
Data sources: http://www.rba.gov.au/statistics/exchange rate.html
As Australia is the world’s third largest exporter, the AUD, considered as a “commodity currency” is dependent on the price of commodity such as gold (Jia, 2010) which is often associated with AUD/USD as illustrated in Figure 3. By 2008, the recession had reached its nadir. The demand of commodities decreased significantly, and prices fell sharply with crude oil diving to around USD$40 per barrel (Forbes, 2009). October 2008 saw the AUD plunged by 16.4%, the biggest drop over the five year period, as gold prices fell to USD$730.57. When gold prices surged by 10.4% reaching USD$975.5 in May 2009, the AUD appreciated sharply by 8.9%.

Figure 3 Trends of AUD/USD and Gold Price
Data sources: http://www.rba.gov.au/statistics.html
Figure 1 shows, between June 2008 and December 2008, the exchange rate of AUD fell significantly from USD$0.9626 to USD$0.6928, which may be caused by merchandise trade balance. In 2008, the subprime crisis deepened and with the collapse of Lehman Brothers, a tremendous impact was felt across the global financial market. Currency carry trades which had been practiced for almost eight years were ceased (Kathy Lien, 2010). As many banks had stopped the financing of trade, world trade volume tumbled with the Baltic Dry Index (BDI) retreating by more than 90%. Australia, being an export-driven economy was badly affected by the sluggish international trade.
AUD appreciate continuously from October 2006 to December 2006. In the same period, RBA increased the interest rate from 6.00% to 6.25% (RBA, 2011). This attracted more foreign investment and lead to the appreciation of the AUD as shown in Figure 3.

Figure 4 AUD/USD Exchange Rate and Interest Rate over Five Years
Data sources: http://www.rba.gov.au/statistics/cash-rate.html
AUD/USD
Mean 0.834323 Skewness -0.26454
Standard Error 0.011879 Range 0.3725
Median 0.844 Minimum 0.6438
Standard Deviation 0.092017 Maximum 1.0163
Sample Variance 0.008467 Sum 50.0594
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