From the article titled ‘Australian dollar’s next stop? US65¢ predicted as commodity prices decline’ (Australian Financial Review July 17, 2015), answer the following questions.
(a) Briefly summarise the main issues discussed in this article? [Not exceeding 200 words] – (25 Marks)
(b) Using Demand and Supply model of exchange rate determination briefly explain how AUD is determined in the forex market, and what factors influence its fluctuations. – (15 Marks)
(c) Using exchange rate data from Reserve Bank of Australia and graphs (monthly data of last three years) analyse the movement of AUD relative to that of the US dollar? Is it in line with the world commodity price movement during this period? Are there any other factors contributing to this behaviour of the Australian dollar? – (25 Marks)
(d) Do you think that the AUD will fall as low as US 65C by the end of 2016? Justify your answer. What advantages do you think Australia will have in such a scenario? – (15 Marks)
(e) If the market rate is US 65C then what action could the Reserve Bank of Australia take in order to maintain the exchange rate at US 70C, and what side effects might this action have on the Australian economy? Do you think that such actions would be effective? – (20 Marks)
Word Limit: 2000 words maximum. Word count (excluding references) must be provided. Excess words will not be marked.