Australian Dollar Prospect

PHASE 5: (March, 2009 – Mid October, 2010)

The last phase as seen in the graph (appendix 1) is from March, 2009 to mid October, 2010. Despite the chaos caused by the GFC, Australia is one of the nations that succeeded to recover from the crisis soon enough. The AUD strengthened from March, 2009 to April 2010 even though small significant fluctuations occurred from mid November, 2009 to April 2010. Its value then dropped from end of April 2010 to end of May 2010, and has then risen sharply from May 2010 to October 2010. This could be explained as follows:

Analysis from March, 2009 to April, 2010

High interest rate differentials

After the GFC which caused trauma to most market players, investors became more risk-averse than ever before. In response to this, The Reserve Bank of Australia decided to maintain interest rates higher than other countries reaching to a level of 4.5% (see appendix 2: figure7) and so the interest differential between Australia and the US increased. This successfully attracted foreign investment due to the higher investment returns causing the AUD to appreciate rapidly against the US$ because foreign investment leads to higher demand AUD which in turn increases its value.

Increasing Gold Prices

Moreover, soaring gold prices also played a major role in boosting the AUD value during this phase. As Australia is the world’s third largest producer of gold, the AUD has an 80% positive relationship with the movement of gold prices as seen from appendix 2: figure 10 (Blystone, 2006). Appendix 2: figure 11 shows that during March 2009 to April 2010, gold prices rose by 28.66%. This explains the appreciation of AUD from 0.6574 on 20th of March 2009 to 0.942 on 30th of April 2010 due to high demand of AUD.

Analysis from April, 2010 to May, 2010.

(Reason)

However, from April 30 to May 20, the Aussie depreciated substantially from 0.942 to 0.8094. It is mainly because of the crises in the Euro-zone such as banking crisis in Spain, the...