Assignment: Research Report

Read the article titled "Australian dollar tipped to slide back to 70 US cents" (Sydney Morning Herald January 29, 2018, uploaded to Moodle), and answer the following questions:

(a) Using a Demand and Supply model of exchange rate determination, briefly explain how the exchange rate of the AUD is determined in the forex market, and what factors influence fluctuations of it.

(b) Using nominal exchange rate data and trade weighted index data from the Reserve Bank of Australia website (use monthly data for the last three years) and analyse the movement of the AUD relative to that of the USD using a graph. In your opinion what are the factors contributing to this behaviour of the AUD?

(c) Summarise the main issues discussed in this article. Using the demand and supply framework discussed in part (a), show and explain how these main driving forces would impact the AUD/USD exchange rate..

(d) Suppose you are a manager of an Australian firm which imports electrical machinery from the US. Some of the analysts interviewed in the article expect that the AUD/USD exchange rate is going to change from US 80C per AUD now to US 70C per AUD one year from now. Explain the impact of this depreciation of the Australian dollar on your firm. Thinking about the overall Australian economy, who will benefit and who will lose from such a depreciation?

(e) Suppose that the AUD/USD exchange rate stabilises at around US 72C per AUD one year from now. What action could the Reserve Bank of Australia take in order to bring the exchange rate back to US 80C per AUD, and what side effects might this action have on the Australian economy? Do you think that such actions would be a reasonable economic policy? Explain your answer.