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BAFI1002 Financial Markets

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BAFI1002 Financial Markets

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Course Code: BAFI1002
University: Royal Melbourne Institute Of Technology

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Country: Australia

Question:

Once you have completed your analysis, you must state clearly what you believe will happen to the currency pair of your choice. For example, if analysing AUD/USD and you expect the exchange rate to go down, you should state that the AUD would be expected to depreciate against the USD. Keep in mind that currency appreciation and depreciation happens against another currency, so statements like “the AUD will appreciate” and “the AUD/USD will appreciate” do not make sense. Note that only a qualitative forecast is required a quantitative forecast goes beyond the scope of this subject.
You are expected to source your information and relevant statistics from reputable sources. DO NOT use generic sources such as Trading Economics and Wikipedia, which might attract penalties. These sources get their information from official sources. Therefore, you should be able to get the data from these official sources. For example, if you are after the cash rate of Australia, you can easily source that from the Reserve Bank of Australia rather than get that information from Trading Economics.
Note that you should keep a list of your references somewhere handy;  you will need to write up your market view for your final report.
The format of the  market view
The market view will be done individually to be uploaded online on Canvas BY FRIDAY OF WEEK 7.
Marking
You will be marked on the following basis:

Presentation quality
Strength of arguments
Number of indicators and references
Clear and concise points made
Clear conclusion made on currency pairs

Answer:

AUD/USD and AUD/JPY
The paper discusses the financial market review of the AUD/USD and AUD/JPY in the world market and within the domestic market. The paper analyzes how exchange rates vary under different economic factors. It also determines the indicators what affect the AUD/USD and AUD/JPY in the economy in relation to the exchange rate. Additionally, the paper finds out which indicator causes the currency appreciation and depreciation. It concludes with the analysis of the forecasts for these exchange rates in the near future.
Analysis of AUD/USD and AUD/JPY
Different scholars provide different technical analysis of the AUD/USD and AUD/JPY in terms of economics either on a daily basis or annually with different forecasts. Both positive and negative results from different analysists have been given out concerning how AUD/USD and AUD/JPY affect each other in the next three months. For example, the AUD/USD provides the negative trades in today’s opening which falls under the continuous negative pressures that come from the EMA50 (Tejvan, 2010).The effect remains valid in the next three months and will be conditioned by the stability of the prices in the economy.  
The trading range is expected to increase from the original value of 0.71 to around 0.72 hence leading to appreciation of the currency. But also, other scholars give positive analysis of the AUD/USD and AUD/JPY on the foreign exchange rates whichwill lead to the appreciation of the currency say in the next three -six months (Tejvan, 2010).
The AUD/USD pair resumes its negative trading rates after the results showing 0.720 of the barriers with an aim to reduce this bearish rate in the next three months. All this depends on how trading inside the bearish is organized to lower the price of the commodities which finally leads to depreciation of the currency. Most scholars turned up with positive trades the pair of AUD/USD but emphasized its decline in the next period of months due to pressure by the EMA50. The scenario is true because the EMA50 supports trades within the channel of bearish (Flassbeck, 2018). Also, the analysis of the results found out that AUD/USD and AUD/JPY show a sideways trading rate in the next three months and this is because it settles below the pressure of EMA50 (Flassbeck, 2018).
Much of the changes in these foreign exchange rates are expected to occur in the next month following the current trades in their respective countries (Citibank, 2018). For example, the president of china who is Xi Jinping in his speech at Boao Forum anticipated an increase in the Australian Dollar in the next three months (Citibank, 2018). With improved market conditions for both foreign and domestic firms, prices of exports are expected to increase and hence domestic currency appreciation (Citibank, 2018). Similarly, low import tariffs on cars and protection of domestic goods will also lead to currency appreciation in the next three months. Additionally, these foreign exchange rates will also push both Japan and China forward into an economic globalization. It also analyzed that, the AUD is expected to be above the USD in the next three months since it is very sensitive to changes in the foreign exchange rates (Citibank, 2018).
Analysis of AUD/USD
The AUD/USD will attempt to break the trending line in the next three to six months from its original point (AUD Outlook, 2018). With the break up of the trading line, foreign exchange rate would be attempted to raise the trade at 23.60% with the spikes of 0.776. The United State economy will not be affected with the break up since its relative interest rates would remain the same after the trend line. However, with the Australian economy, relative inflation rates are seen to begin raising until the original point is restored. It will also be followed by the falling test of the wedge and 200.0MA at a rate of 0.78100 (Jingtao e t al 2010). Similarly, in both countries, relative growth rates are seen to be increasing since both nations aim to reduce commodity prices and protect domestic firms. Finally, there is a currency appreciation in both nations due to high interest rates which leads to high demandfor their domestic currency by the investors (AUD Outlook, 2018). Nevertheless, support will be needed to gain more from the foreign exchange up-to the range of 0.765 with the next three months the trend support will be below 0.762
More so, inflation will rise in Australia since the American Dollar seems to be higher than the Australian dollar which results into higher prices for commodities. With a high inflation rate in Australia, it will lead to currency depreciation since more Australian Dollars would be needed to purchase a single American Dollar (Pedersen, 2018).
Analysis of AUD/JPY
In the current time period, AUD/JPY reduced from the level of 80.6 and attempts to increase above the break line trend of 23.60% with spikes at 82.6 as shown in the diagram bellow. With any point above the break line, more gains in trade are expected. When the demand for domestic goods increases in Australia, prices also increase which leads to currency depreciation within the nation (Jingtao e t al 2010). Also, the government of Australia intervenes in to control the prices so as they can come down with an expectation of a positive foreign exchange rate. Once prices reduce, the government expects to have a currency appreciation since imports become more expensive than exports. The aversion will be followed by the 50.0% spikes of 84.6. On the side of the flip, a clumsy turnaround finds the trend support at 81.6 and finally at 80.6.

Figure1 AUD/JPY graph (Tejvan  2010).
According to the recent findings the trade balance of Australia was able to beat expectations; however, the overall cash totals are unstable and contrasting mainly due to the poor and worsening trade situations. The overall levels of imports were steady, however the exports generally declines. The AUD/JPY is moving over the 80.00 level.  Following the Australia’s trade hitting expectations, this is the major technical handle. It should be noted that overall trade balance of Australia was at $1.551 billion which was above the contraction, however this is better in as for the previous periods are concerned which was at $1.87 billion. The overall levels of imports were stable at the level of 0 percent following last month-1 percent. The overall levels of exports declined at a levek of negative one percent when compared to the former three percent. The currency pair is therefore struggling to effectively make 80.00 and above confident strides (Jingtao e t al 2010).

Figure 2; Graph showing AUD/JPY(Tejvan 2010)

Figure3; Graph showing AUD/JPY
From the graphs above, prices of the commodities are seen falling in the blue line. In this case, domestic consumers are purchase more of the goods than before which increases production. While the economy of Japan is expected to perform well in the next three months since its currency is growing every day. The JPY currency is appreciating since inflation is low, interest rates are also low and there is growth within the nation. It is accompanied with government intervention that comes up with its central bank to control all other variables. All in all, Japan’s economy is better of than the Australia simply because the Japanese Yean is higher than the Australian Dollar (Jasic, 2010).
Finally, the researcher believes that the AUD is expected to depreciate against the AUS since the American Dollar is much stronger than the Australian Dollar. In all cases, America has a better economy compared to Australia. And with this, government of United States has the ability to keep their dollar higher than any other dollar (Jasic, 2010). The Australian Dollar to American Dollar forecasts show that, in the next three months the Australian Dollar is not stable as it increases and decreases occasionally.
Table 1: The table below shows the AUD to ASD for the next three to six months (Christin e t al 2018).

Month

Open

Low-High

Close

Mo, %

Total %

                                   2018

Sept

0.7200

0.690-0.720

0.70

-2.20

-2.20

Oct

0.7000

0.680-0.700

0.69

-2.10

-4.30

Nov

0.6900

0.660-0.690

0.67

-3.00

-7.20

Dec

0.6700

0.660-0.680

0.67

0.30

-6.90

                                   2019

Jan

0.6700

0.650-0.670

0.66

-2.20

-9.00

Feb

0.6600

0.640-0.660

0.66

0.50

-8.60

Mar

0.6600

0.640-0.650

0.65

-2.00

-9.00

The table above shows that the forecasts are not stable during though mostly it forecasts a declining Dollar in the next three to six months. For example, the AUD is expected to be at 07.200 (open) and 0.704 (close) in the month of September, 0.7000 (open) and 0.6900 (close) in the month of October, 0.6900 (open) and 0.6700(close) in the month of November, 0.6900 (open) and 0.6700 (close) in the month of December. While in the following year, 0.6700 (open) and 0.6600 (close) in the month of January, also, 0.6600 (open) and 0.658 (close) in the month of February. Finally, the month of March, the AUD is expected to be at 0.6600 (open) and 0.6500 (close) (Christin  e t al 2018).
Conclusion
All the above factors determine the foreign exchange rate fluctuations though there are other many factors such as speculation and recession. But all have different impact on currency of the country; that is to say, the country can either experience a currency appreciation or depreciation. What matters here is which has affected the financial market in a negative or positive side for one to have a currency appreciation or depreciation.
References
AUD Outlook. 2018. Australian Dollar Outlook. Still Backing the Bulls. St. George. retrieved from: https://www.stgeorge.com.au/content/dam/stg/downloads/report-centre/eco-reports/STG_AUD_Outlook_29_Jan_18.pdf
Christin Tuxen, Morten Helt and Jens Pedersen. 2018. FX Forecast Update ECB rate guidance delays EUR bounce. Forecast review part 1, Danske Bank. Retrieved from: https://research.danskebank.com/link/FXForecastUpdate180618/$file/FX%20Forecast%20Update_180618.pdf
Citibank. 2018. Citibank Wealth Management. Weekly FX Insight: Data Forecasts, FX Analysis. Retrieved from:https://www.citibank.com.hk/global_docs/mobile/investment/pdf/fx_insight_e.pdf
Heiner Flassbeck. 2018. Exchange rate determination and flaws of mainstream monetary theory. Brazilian Journal pf Political Economy. University of Geneva, Switzerland. Vol 38, pg. 99-114. Retrieved from: https://www.scielo.br/pdf/rep/v38n1/1809-4538-rep-38-01-99.pdf
Jingtao Yao, Hean-Lee Poh and Teo Jasic. 2010. Foreign Exchange Rates Forecasting with Neural Networks. Department of Information Systems and Computer Science. National University of Singapore. Retrieved from:https://pdfs.semanticscholar.org/2973/3aa5326797ebd0f96b4746b229674144e539.pdf
Tejvan. 2010. Factors Which Influence the Exchange Rate: Economics, Helping to Simply Economics. PPE at LMH, Oxford University. Retrieved from:https://www.economicshelp.org/macroeconomics/exchangerate/factors-influencing/

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