Australian Currency Fluctuation and Foreign Currency Trading

Australian Currency Fluctuation and Foreign Currency Trading

Introduction

Currency fluctuation is the change in the value of one currency relative to another (Gary, 2006). Woodhead-Faulkner (2003) state that a relationship exists between the monetary value and the law of supply and demand impacted by a country’s level of activity or the nation’s central bank intervention through increasing or decreasing interest rates.

Effects of currency fluctuation on Australian exporters                

The impact of currency fluctuation on a sector depends on the degree of a country’s exposure to international trade (Viaene, Jean-Marie & Casper &Vries, 2004). According to Viaene et al., (2004) the trade sectors having more exposure to international trade are more affected than those that are relatively trade exposed. Most of the manufacturing firms in Australia are primarily trade exposed and as such the organizations bare the full effects of Australian dollar fluctuation. An unexpected change in the value of the dollar can have an impact on the exporter’s profit. The Australian currency fluctuates regularly causing a fall or a rise in its value. Wang, Kai-Li and Christopher Barrett, (2007) state that, a sudden rise or drop in the dollar’s value can cause the exporter to earn or lose money depending on the movement.

According to Rahman, Sajjadur and Apostolos Serletis, (2009) depreciation of a country’s foreign currency results to lower export prices and higher import prices, hence the expenditure switching effect increases the demand for domestic goods and net exports. The scenario leads to a positive impact on the exporters due to high-profit margins as a result of high demands of commodities. In the case where the value of the Australian dollar drops, the currency will have a positive impact on the exporters because the prices of the exports will be lower compared to the imports. Decline in export prices will increase the demand for the exports and in turn, increase the net exports leading to high-profit margins (Zhao, Laixun & Yuqing Xing, 2006). When the Australian dollar dips compared to other countries foreign currency for example US or China the prices of Australian exports are lower compared to other nations. The consumers from such countries will purchase more products from the Australian exporters.

Zhao et al., (2006) concurs that depreciation of the trading currency improves the competitiveness of the exporter’s exports in the international market raising the output and sales revenue of the exporting firms. Value loss of the Australian currency will, therefore, improve the competitiveness in the international markets.

Relationship between international and foreign monetary trade

International trade is the exchange of goods, services and capital between different countries in the world that is across international borders, or territories involving the activities of individuals companies or governments (Viaene et al., (2004). Foreign currency trading refers to the buying and selling of currencies from different countries (Gotthelf & Philip, 2003). Ricardo (2006)  notes that to purchase the foreign goods, services, and capital or to invest in foreign countries, individuals or companies will have first to buy the country’s currency (Gary, 2006). In an article by Rahman et al., (2009) the market where the buying and selling of the overseas money occurs is referred to as foreign exchange market. The exchange rate is the price of one currency in relation to another country’s currency (Rahman et al., 2009).

Comments on the weakening of Chinese currency

China is Australia’s largest trade partner and the biggest customer for Australia’s minerals such as iron ore. The declining of the retail sales and production figures in China has resulted in a drop in the Australian exports to China (Ricardo, 2006.). Therefore, for the mining and other commodity-exporting companies in Australia to compensate for the falling prices, the firms will increase productions and shipping, a scenario that would drive the prices even lower. The undertaking will lead to the weakening of the Australian dollar.

Bibliography

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Gotthelf, Philip. 2003. Currency Trading How to Access and Trade the World’s Biggest Market. Hoboken, N.p.

Kalcheva, Katerina. 2003. “The Impact of the Euro-Dollar Exchange Rate on Countries with a Currency Board: The Case of Estonia Bulgaria”. Eastern European Economics.. 41, no. 22-68.     N.p.

Ozturk, Ihan and Huseyin Kalyoncu 2009, Exchange Rate Volatility and Trade: An Empirical Investigation from Cross-Country Comparison. N.p.

Rahman, Sajjadur and Apostolos Serletis 2009, the Effects of Exchange Rate Uncertainty on Exports, Journal of Macroeconomics 31: 500-507. N.p.

Shoup, Gary, 2006. The International Guide to Foreign Currency Management. Chicago: Glenlake Pub press

Viaene, Jean-Marie and Casper G. de Vries 2004, International Trade and Exchange Rate Volatility, European Economic Review 36 (August): 1311-21.N.p.

Wainman, Woodhead-Faulkner, 2003. Currency Fluctuation: Accounting and Taxation Implications. Cambridge: N.p.

Wang, Kai-Li and Christopher Barrett 2007, Estimating the Effects of Exchange Rate Volatility on Export Volumes, Journal of Agricultural and Resource Economics 32 (August): 225-255.N.p.

Zhao, Laixun and Yuqing Xing 2006, Global Production and Currency Devaluation, Review of International Economics 14 (May): 202-211.N.p

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