My Journal
Lucia Galovicova
13-10-04

Foreign exchange rate responses to many different factors in the economy including the economic stability, interest rates, house market, import & export, investment, oil prices, unemployment, or elections. Exchange rate is a price of one currency related to another.

Both the inflation factor and the purchasing power of the currencies directly impact currency exchange-rates. Consumers try to avoid the eroding effect inflation has on their purchasing power. Consequently, goods from countries with a low inflation rate become more attractive than the goods from countries where the inflation is higher. In turn, the currency from the lower inflation country rises in value, while the currency from the higher inflation country falls in value. Another factor affecting the exchange rate between the Australian Dollar and other currencies is the merchandise trade balance. By definition, the merchandise trade balance is the net difference between the value of merchandise being exported and imported into a particular country. For example, if we consider the exchange rate for AUD/USD. Australia imports products from the U.S. To pay for them, we need US Dollars; therefore, the Australian companies trade Australian dollars for US Dollars. On the other hand, because Americans buy Australian-made goods, they purchase Australian dollars to pay for our goods. The net effect is an increase in the supply of US Dollars and Australian dollars. The fact is that the foreign exchange market is the world's largest market; the BIS (Bank for International Settlements) estimated an USD 1500-2000 billion average daily turnover in trading currencies. This demand rises from international trade of goods and services, cross- border capital transactions involving investment and borrowing of funds, central bank transactions with the market or speculative transactions to accumulate profit from favorable movements in future exchange rates. Westpac’s chief currency strategist Robert Rennie thinks that A$ will slide to $US66c by mid- next year, although his view isn’t shared. Deutche Bank currency strategist Richard Yetsenga puts the A$ at $82 by that time, emphasizing that US trade and budget deficit and inability to attract private investor investment add up to the mix and will pull the US$ down. As we can see is very hard to predict the exchange rate and especially at this time. We could say that the main drivers of the currencies are confidence and fear. It changes depending on information that is released to the market, economical, political, financial and social, which is provided by institutions like Renters and Bloomberg. These issues are monitored, analyzed and discussed over these 6 weeks and used to make decisions at the end of each week. At the maximum of 50 contracts to be traded every week, where 1 USD futures contract represents $ 100 000 face value of AUD, I was trading contracts based on my weekly observation.While these example talk about how currency exchange rates can float in the foreign exchange, the currency exchange also creates risk. For example when an American wine shop contracts to buy 1,000 cases of French wine, the merchant may agree to pay in French francs, say 600 francs per case, when the vintage is ready for shipment in two years. Over the next two years, the value of the U.S. dollar drops from 20 cents/franc to 40 cents/franc, raising the price of each case from $120 U.S. dollars to$240 U.S. dollars. Thus, pricing the wine in francs exposes the American wine merchant to a currency exchange-rate risk. Of course, if the wine was priced in dollars ($120 per case) it would relieve the American merchant from the currency exchange-rate risk. But now the French wine producer would suffer, as the value of the dollar fell from 20 cents/franc to 40 cents/franc. In this example the French merchant would only receive half as much per case (i.e., 300 francs).Because of these risks, governments throughout history have intervened to fix currency exchange-rates. In 1944 western world leaders met in Bretton Woods, New Hampshire, to create the IMF (International Monetary Fund) to deal with world economic and financial problems that occurred following the Great Depression and World War II. As part of the agreement, the value of the U.S. dollar, the worlds leading currency at the time, was set at 1/35 of an ounce of gold.

My Journal:
WEEK 1 (From 18/8/04-25/8/04)
Exchange rates:
Wed: 0.7205
Fri: 0.7186
Sat: 0.7273
The 5-day average was 0.7124 and that is reasonably strong and stable position.
OBSERVATION:
After the long research the first week I was quite positive about my decision, I was observating the currency for a week. Here are my results.
Australian dollar reached it’s peak (in 10 years) in July and the pattern seems to be going down, I also monitored massive oversupply in the housing industry which dedicates that the economy was somewhere around the peak in the business cycle so I expected slight decrease in the exchange rates. Another good reason that I relied on was the information about elections coming, so I concluded the RBA would not want to interfere with the election campaigns and would not push the interest rate up just yet. I expected the real interest rates go up after the elections due to an increase in the real rate of interest, which would make aussie dollar interesting to buy, because the currency would be likely to appreciate as well as stock prices would decrease and this would decrease the economic activity as well as inflation.
Next week the US economic date will be released, which will certainly influence the US Federal Reserve’s massage. (Alison Montgomery, Westpac’s senior currency strategist)
DECISION MADE: Sell 20 contracts

WEEK 2 (From 26/8/04- 1/9/04)
Exchange rates:
Tue:0. 7125
Wed: 0.7164
Fri: 0.065
OBSERVATION:
After the first week I found out that my observation was correct and as I expected I made a profit.
This week the $US fell almost 2c over the week as the US dollar strengthened on falling oil prices. The pattern was very down hill over the week, what just strengthened my opinion about selling the Aussie dollar again. The Long position is bet that the currency is going to rise. (Market Wrap 27/8/04), but the difficult part is decide when it is going to happened. In short term I assumed it would drop, because the capital expenditure rose by 5.8% in the June quarter.
Also the housing construction is expected to slow and, as a result, sectors such as hardware and building materials will be hit (Market Wrap 1st of sep, 04).
At the moment I think is definitely time to sell, the forecasts predict 16% growth rate through this financial year, but that is the long run prediction. And again the elections are still playing a big role now as well as they were playing big role in the past. Election cycles have moved the A$ especially because investors were not certain with the change of government, which always brings pressure on the home currency. In 96 A$ fell after the coalition wrested government from labor. In 98 A$ fell again after victory by the coalition and in 2001 declined again because the poll suggested a Labor victory. The Us dollar tends to appreciate in the month surrounding elections in which the current president is likely to be reelected said Deutche Bank senior currency strategist Marshal Gitller. Chief economist for JP Morgan Stephan Walters expect the $A to be at US73c by the end of this year. In four of the past five elections, the earliest the Federal government change the interest rates was in January, which is a short term good news for us, although in tree out of past five federal elections the RBA has changed rates at the first available opportunity. Other indicators is that American dollar is very strong and it seems to be going up.
DECISION MADE: Sell 15 contracts

WEEK 3 (From 2/9/04- 8/9/04)
Exchange rates:
Fri: 0.6975
Mon:0. 6916
Tue:0. 6938
OBSERVATION:
My decision from last week was correct and in 2 weeks I made profit of $65,625. I suppose I was too happy that I made that much profit that I stopped doing my research and just followed the pattern. After a read my article in the market wrap, I decided to sell my contract this week. I followed the pattern since February and the graph below shows the Australian dollar being bit the losing streak, the predicting by David Bassane was that the next stop could be AU65c, before the federal elections even finish.
My decision to sell wasn’t the right decision. This was the time to change tactics but when I understood it was too late. I was persuade that there is not much change in the economy and that the $AUS has been on the losing streak, and it didn’t look like it would change anytime soon. On the trade weighted bases, the $A is still about 6-7% above it’s average since the mid 1980’s in both real and nominal terms. (Market Wrap). It was expected that interest rates will rise but the employment results in the US and rising oil pricing seems to slow the process.
Predict is that A Greenspan will rise interest rates in the US on 21st of September. The RBA has been paralyzed until the elections( 9th of October). All my research was showing sell, but I didn’t look close enough to understand that it meant sell. The rising A$, an expected easing in housing activity uncertainty about recovery prospect of lower inflation.
DECISION MADE: Sell 10 contracts

WEEK 4 (From 9/9/04- 15/9/04)
Exchange rates:
Fri: 0.6963
Sun:0. 6902
Tue:0. 6988
OBSERVATION:
First time made a loss of $42,802.The trend was slightly upwards and the forecasts started to come true, but still could not see this. The oil prices fall, the interests rose a little bit, so it was definitely suppose to buy, because the oil prices affected $A. Another very important issue, that I missed out on and that had significant influence on my decision was Jakarta bombing on the 10th of September. The Jakarta bombing once again shocked the financial market with the Aussie dollar falling a third of US cent and money market interest rates falling in response. This was certainly time to buy Aussie dollar, even though most important issue remains the relationship between Australian and American interest rates. The positive attitude towards American economy by Federal Reserve Alan Greenspan has significant effect on Australian economy.
The forecast that the American interest rates will rise sooner than expected will push aussie dollar down as well as the suggestion that our own interest rates will not increase will push the aussie dollar down.
The push me, pull you effect of the money market right now is having greater influence than any terrorist attack can sustain (Ross Greenwood, Business and financial editor, Nine network).
And as we know if the investors lose the confidence in the economic leadership of the country, they punish national currency.
DECISION MADE: Sell 5 contracts
WEEK 5 (From 16/9/04- 22/9/04)
Exchange rates:
Thr:0. 6948
Fri:0. 6986
Tue:0. 6988

OBSERVATION:
I kept losing last couple of weeks and there was no chance that it would turn around the other way and I knew that so I had decided to save as much money as I could. If I could buy I would make some profit again but a was in the position –50 and I decide to buy it all back, because If I would keep selling I would lost everything, I knew that it will go up but it was hard to guess when. Even when I got my first warning in week 4 I ignored it and the same at week 5, it was very obvious it has got the up pattern again. The big role this week was played by oil crises. This is the 4th oil crisis in the history. The surging oil prices had been a bad new for global economy. All of these crises have something in common (1974-75, 1982-83, 1991). All have been preceded by a large increase in oil prices and at the same time tightening the monetary policy by the Federal Reserve, says Deutche Bank commodity analyst Michael Lewis. This influence Aussie dollar as well because US$ is one of the currency of energy exporting countries and when oil prices are rising it strengthened the position of American dollar. Again we can come back to the elections, the interest rate are keeping very steady so the RBA doesn’t influence the campaign. What is going to happen after the elections? J.Howard claims that he will keep the interest rates low, and that if labor party wins the interest rates will go up like previous years. Governor Ian Macfarlane said: ‘First of all lets start the obvious: the federal government does not set the interest rates, The Reserve Bank of Australia does.
DECISION MADE: Buy 50

WEEK 6 (From 23/9/04- 29/9/04)
Final statement
Over all I ended up with profit of $17,007. If I could sell and dollars 2 weeks ago but because I didn’t give myself a very good choice with the closing position –50 I really could not do that much. Either I will keep risking and hoping the Aussie dollar will go down or just stop waste all the money that I accumulated the money that I earned the first 2 weeks. At the time I already new that the Aussie dollar is on the way up and certainly not down. These days Aussie dollar is around .7380, which the opening position for J. Howard old-new government. He was swept back to his position after the weekend’s elections with increased seat in parliament and allowing reform to strengthen the economy.
“Overall, the value of lending to housing remains uncomfortably high for RBA” said Citigroup economist S. Halmarick, although on it’s own he said the data was not an immediate trigger for near- term hike in interest rates. Clearly, it constitutes a long term positive for the currency and asset market said Craig Ferguson, senior currency strategist at ANZ Investment bank. Mr Schuman said the Australian dollar had enjoyed a powerful five US cent rally, from around 69c to almost 74US cents, over the past three and a half weeks. The reserve bank will meet in next few days to discuss the interest rates because number of economists believes that interest rates will increase before Christmas. The A$ closed last week at 0.7273 having started the week at 0.7245. The NZ$ closed last week at 0.6753 having started the week at 0.6784. The Euro closed last week at 1.2410 having started the week at 1.2408. The GBP closed last week at 1.7934 having started the week at 1.7978. US$/JPY closed last week at 109.44 having started the week at 110.40. Even thought it might be sometimes difficult. I certainly think that good research and constant monitoring of the market will give us pretty true picture what is happening in the home and world economy.

The graph shows the movement of the $A during the period of 6 months and some of my decisions were based on these graph. We can clearly see that the pattern it positive with some negative fluctuations.

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Aussie dollar vs American dollar