Free Essay

Is the Australian Dollar Currently Undervalued?

In: Business and Management

Submitted By KoroRoro
Words 493
Pages 2
Is Australian dollar is substantially overvalued?
No.
As we know, the BMI is based upon the price of a Big Mac in one country relative to another country, and comparing that with their exchange rate.
However, is the BMI a reliable method? It has a major flaw; that of which it does not account for non-tradable goods. The index assumption that the costs of the goods are the same and purchasing power parity would hold, but that is not always the case. The BMI fails to account for non-tradable goods, such as tax, transaction costs, wages and rent. Even if the prices of tradable goods are said to be equalised via arbitrage, they are still subject to regulations, subsidies and trade barriers that might warp the costs. This biases can distort the perceived valuation.

Another point that we shall look at would be in the following graph of the exchange rate within the last 10 years. As we can see, there has been an upward trend barring the financial crisis. This might point to the fact that the adjusted BMI that is using past data is might be biased towards a lower relative PPP, and does not account for the sustained growth trend that we have experienced. A new valuation of relative PPP should be considered, considering that Australia’s core commodities market is still going relative strong, despite China’s growth slowdown. <http://www.abc.net.au/lateline/content/2012/s3447302.htm> One could argue that the USD, having being shaken by the financial crisis, would be weak. As the AUD recovered faster and stronger than the USD, this might point to the assumption that the AUD is overvalued when compared to the USD, when it might the USD that is weak.

The RBA’s official stance on this matter is that the AUD is NOT overvalued. In a statement by the Reserve Bank Deputy Governor Doctor Philip Lowe, says that Australia’s GDP growth, inflation, interest rates and unemployment are all within their expected range, and that our low unemployment rate, which has remained below 5.5 per cent for the last two years, that indicates the Australian dollar is not over-valued.
"If the unemployment rate were to rise persistently, it might suggest that the contractionary effect of the high exchange rate was more than offsetting the expansionary effect of the investment boom in the terms of trade," he said.
"If this were to turn out to be the case, monetary policy would have the flexibility to respond provided that the inflation outlook remained benign."
What this means is that the Reserve Bank was quite comfortable with the level of the dollar and interest rates, and will not intervene unless unemployment climbs noticeably.
The Aussie dollar has held up reasonably well against bouts of risk aversion this year and attractive interest rates, a rising terms of trade and firm underlying economic fundamentals continue to spur demand for the Aussie.…...

Similar Documents

Premium Essay

Australian Dollar Forecast

...Raashi Chawla Australian Dollar Analysis History: * The Australian Dollar is the currency of the Common Wealth of Australia, including Christmas Island, Cocos (Keeling) Islands and Norfolk Islands as well as the independent Pacific Island States of Kiribati, Nauru and Tuvalu. Within Australia it is almost always abbreviated with the dollar sign ($), with A$ sometimes used to distinguish it from other dollar-denominated currencies. It is subdivided into 100 cents. * Prior to 1983, Australia maintained a fixed exchange rate. The first peg was between the Australian and British pounds, initially at par, and later at 0.8 GBP (16 shillings sterling). This reflected its historical ties as well as a view about the stability in value of the British pound. From 1946 to 1971, Australia maintained a peg under the Bretton Woods System, a fixed exchange rate system that pegged the U.S. dollar to gold, but the Australian dollar was effectively pegged to sterling until 1967. With the breakdown of the Bretton Woods system in 1971, Australia converted the traditional peg to a fluctuating rate against the US dollar. In September 1974, Australia valued the dollar against a basket of currencies called the trade-weighted index (TWI) in an effort to reduce the fluctuations associated with its tie to the US dollar. The daily TWI valuation was changed in November 1976 to a periodically adjusted valuation. * On 12 December 1983, the Australian Labor Government led by Prime......

Words: 4161 - Pages: 17

Free Essay

Australian Info

...Australian Political System – A closer look August 3, 2012 By ulipops The political system of Australia comprises of 3 main tiers of the government mentioned as below. 1- The Federal Government – Australia, known to be a constitutional monarchy makes use of a parliamentary system of the government. This is further divided into three different branches called legislative, executive and judiciary. The constitution of the Democratic legislature comprises of the Queen, the Senate and the House of representatives. The federal Government is allocated with certain powers while the legislative powers are handed over to the Commonwealth Government. 2- Territory and State Government – There are ten territories in Australia located just outside the state borders. Out of these ten territories, the Commonwealth has authorized to have limited rights of self government to ACT (Australian Capital Territory), NT (Northern Territory), two mainland territories and the Norfolk Island. Regarding the states, Australia has a total of six states namely Tasmania, West Australia, South Australia, Queensland, New South Wales and Victoria. Each state has its own constitution that is run by the federal branches known as legislative, executive and judiciary. The state government has the right to pass laws which even the Commonwealth Government does not have. 3- Local Government – The local government is a subdivision of the States and the Northern territory. Canberra known to be Australia’s National...

Words: 1440 - Pages: 6

Premium Essay

Australian Aid

...which is also provided by governments, is channelled through international institutions such as the World Bank and International Monetary Fund. Non-government aid is provided by NGOs e.g. Red Cross & world vision, usually through public donations. Australia’s government aid is administered by the Australian agency for International Development (AusAID).   Each type of aid is focused on a slightly different area: bilateral aid is generally targeted towards health, education and training programs, technological support, building infrastructure, emergency food and basic supplies i.e. shelter, medicine & clothing during crises; NGOs aim to make communities more self-sufficient and ecologically sustainable and multilateral aid is used to fund emergency relief projects, large scale infrastructure, disease control and large scale health, education and training programs. Overall Australian aid is spent equally on good governance, education, rural development, health and infrastructure. Australian aid programs also assist countries to make use of globalisation (new information technologies and trade) and promote sustainable resource management. Each year, Australian government aid is able to help more than 58 million people living in poverty. The Asia-Pacific region is one of the most concentrated regions of poverty in the world (800 million people are living on less than $2 a day) – countries in this region are the main recipients of Australia's aid – however......

Words: 532 - Pages: 3

Premium Essay

Australian Economy

...and asset price inflation (a constraint on economic growth), emerging protectionism and currency imbalances (resulting in lower exports and higher imports). Inflation The media article in essence describes factors that affect inflation. The RBA is predicted to not raise cash rates from 4.75% until May, which help determine the interest rate, a tool helping to dampen demand and thus lower demand-pull inflation. Cash rates were kept on hold as he underlying rate of inflation was around 2.25% which is between the RBA’s target of 2-3% and the recent natural disasters has harmed output (increased interest rates will soften growth so it is not needed when there is low inflation). Also, the “large exchange rate appreciation” of the Australian dollar at the end of 2010 will hold inflation as imported inflation is decreased due to foreign goods and services becoming cheaper. Consumers are being cautious with spending and as a result this will lowers demand-pull inflation only in the short-term, however in the long term this will not persist. Without the floods the RBA may raise the cash rate sooner than May, a dominant factor being the unemployment rate falling to 5% in January which close to the non-accelerating inflation rate of unemployment (NAIRU) where a movement pass this situation of full employment will trigger inflation due to higher wage demands a cause of more specifically cost-push inflation. Strong domestic economic growth of Australia during the global financial......

Words: 1563 - Pages: 7

Premium Essay

Australian Beverages

...Understanding the external environment (Industry attractiveness) 1. Identify the industry, product segments and value chain. The industry is the Australian Non-alcoholic beverage industry. Currently, Australian Beverages Ltd is the second largest competitor behind Butlers Corporation. Industry consolidation has been occurring but is not expected to continue in the future due to the relatively high market shares held by major competitors. Core operations cover processing and bottling (not retailing). Product segments include CSD (in decline stage), Diet CSD, Fruit Drinks, Milk Drinks, Energy Drinks, Sports Drinks, and Ready to drink coffee/tea. Entry into the snack food market was recently undertaken. 2. What is the current life cycle position of the industry? The Australian Non-Alcoholic Beverage Industry is at the mature stage of its life cycle. Whereas, the bottled water manufacturing industry is currently in growth stage. Major segments of the bottled water industry are still water and sparkling water. 3. What have been the key issues affecting historical and future industry growth? What was their impact or their likely impact and the overall assessment of the industry’s future growth? Key Issues influencing growth, using PESTEL Model (Analysis of industry as a whole including bottled water industry. Trends in broad industry also impact the bottled water industry) FACTOR ISSUE Historical / Future NATURE OF IMPACT (+ / = / -) Politics  Import Tariffs – only affects...

Words: 976 - Pages: 4

Premium Essay

The Australian Tax System

...My Opinion of the Australian Tax System Australia is a nation that is envied by many underdeveloped countries for our abundance of public services, transport and healthcare as well as the carefree lifestyle that many Australians have grown accustomed to. However, the Australian taxation system has been persistently scrutinized by its taxpayers for its many pitfalls in providing an equitable means of raising government revenue. In my opinion, the major shortcomings of the Australian taxation system include its lack of neutrality, with reference to high-income earners and small business owners, its constant lobbying towards the baby boomer generation, its current ageing population crisis and the permitted negative gearing of investment properties. Many sweeping reforms have been suggested in an attempt to rectify these issues, however it seems that no such recommendations have been implemented. Neutrality of Australia’s Tax System I believe that there are too many vested interests and rent seekers in today’s society for the Australian tax system to be neutral. However, in my opinion, the Australian tax system favors high-income earners and small businesses, in reference to negative gearing, discretionary family trusts and unfair deductible expenses. Negative gearing refers to when an investor purchases a rental property, but the net rental income is not enough to cover the interest on the money borrowed. Negative gearing favors the high-income earners due to the fact......

Words: 2534 - Pages: 11

Premium Essay

Australian Grocery Stores Industry

...consumption is forecast to increase by 2.6% in 2010, but growth is expected to drop to just 1% in 2011 as the Australian economy, and in turn consumer confidence, is hurt by a slowdown in Chinese demand Key Trends Dairy Industry Dynamism – National Foods has again demonstrated its commitment to the country, announcing in April 2010 that it was to invest an additional AUD5.5mn (US$5.1mn) in its milk processing plant in Malanda, Queensland, on top of the AUD1.2mn (US$1.1mn) already spent on the plant in the previous eight months. The company also plans to invest AUD55mn (US$49mn) expanding its Crestmead dairy plant. These investments can be seen as an effort by the company to remain competitive amid increasingly tough operating conditions. Also in this vein, in May, Murray Goulburn Cooperative (MGC) entered into a joint venture with French multinational Danone in a bid to improve its ability to compete and manage volatile dairy prices, while also lifting its domestic competitive position. By entering Australia, Danone will benefit from the high-spending market. Foster’s Comes To A Decision – After much speculation over what Foster’s Group would do with its underperforming wine business it announced that it would be completely demerging its beer and wine divisions. It is expected that Foster’s beer unit will receive particular attention from potential takeover partners. While the Australian beer market is a mature one, which does not allow for explosive growth opportunities, it......

Words: 34457 - Pages: 138

Premium Essay

Dollar General

...1. Can you suggest what job Dollar General is doing for its customers? Most of Dollar General’s customers are from low, middle and fixed income bracket. Dollar General primarily operates in areas that are under-serviced rural and in urban neighborhoods in second-tier locations. Dollar General offers basic consumable products to meet the basic needs of consumers at low price, in a convenient environment, and make shopping for everyday items hassle free and simplistic. This can be evident from the fact that 30% of merchandise is priced at $1 or less, Dollar General operates on a small store format that are conveniently located in communities that have population of 20,000 or less, are within 5 miles of such communities. The stores are small and convenient for customers to look for products. Dollar General serves a niche market offers low prices by managing and implementing companywide low-cost strategy. 2. Who do you think Dollar General's real competitors are? There are several Price Point retailers, Close Out retailers and Limited Assortment grocery retailers that can be classified in to the dollar store market. But these do not operate on the scale limited to Everyday Low Prices (ELDP) retailers. The Family Dollar is the biggest competitors in the extreme-value dollar market. However, there are 23,000 such stores in extreme value retailers who can be called direct competitors of Dollar General. About 15 companies in this segment have acquired61% of the market. This shows......

Words: 555 - Pages: 3

Premium Essay

Australian Exchange Rate

...The Australian Exchange Rate Abstract INTRODUCTION When first looking at an exchange rates, and foreign exchange, there are a few questions which must be considered. What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past few years that have affected the value of the Australian dollar? In addition to looking further into those questions, it is helpful to know what the word Exchange Rate means; it is defined as, “The rate at which one unit of domestic currency is exchanged for a given amount of foreign currency.”  A BRIEF HISTORY OF THE AUSTRALIAN DOLLAR Until 1971, the Australian dollar (AUD) was “pegged” to the British pound. This meant that the AUD rose or fell in line with the pound. In 1971, the AUD became pegged to the US dollar instead. These currencies were fixed currencies, which meant that the Australian currency would only change value when a major world currency also changed. This system lasted only until 1974 when the AUD became pegged to a trade-weighted selection of other currencies. This was still a fixed currency. In 1976 this selection of currencies became moveable. Small shifts were able to take place when needed. In 1983 the AUD became a floating currency. This means that the value of the dollar is determined by......

Words: 3256 - Pages: 14

Premium Essay

Australian Dollar (a$) Against the Japanese Yen (¥) Four Month Forecast from 1st September to 31st December 2010

...Australian Dollar (A$) against the Japanese Yen (¥) Four Month forecast from 1st September to 31st December 2010 Like the other currencies mentioned in the report, the Japanese Yen (¥) also adopts a floating exchange rate. As this is a short term forecast of the Australian Dollar (AUD) against the Japanese Yen (JPY), a chartist approach will be taken to analyse the movements of the two currencies. The technical method and the effects of the government are the topics that will be analysed for this short run forecast (Moffett et al, 2006 p.136). As of the 1st of September 2010 the Australian Dollar $1 = Y75.93. Technical Method The first step of the analysis will be using the technical method. The technical method skips the fundamental roles of the exchange rate which includes the inflation and interest rates and looks at the exchange rates past history to generate a forecast accordingly (Moosa, I 2010 p.239). According to the graph of the AUS against the Yen (Appendix 2A) it can be seen that the Yen has been running in a bull market (red line) from February to the start of May. This means the market has been running with an upward trend as three tops and bottoms have touched the link (Moosa, I 2010 p.242). A trend reversal has started appearing as the market goes into a bear market but then steadily picks up again to form an ascending triangle (blue line). The market has gone into an ascending triangle as buyers are willing to pay more for the currency. Government The...

Words: 635 - Pages: 3

Premium Essay

Dollar

...Inventory Planning Sales and Operations Planning Capacity Timing Drivers of Inventory and Inventory Policy Drivers of Inventory and Inventory Policy Quiz #1 Capacity Types and Flexibility Complementary Capacity – Oper. Hedging Hedging through Product Design Hedging through Product Design Scenario Based Capacity Plannig Capacity Location and Logistical Design Capacity Location and Logistical Design Capacity Location and Logistical Design Capacity Location and Logistical Design Coordination and Incentives Coordination and incentives Coordination and incentives Quiz #2 Social Responsibilities in SCs Guest Speaker Global Supply Chain Game The Outsourcing Game The Outsourcing Game Review Meet in GSB 5.130 Meet in GSB 5.130 GSG write-up Ikea in India Dollar Tree Logistics China Mexico Dual Sourcing China Mexico Dual Sourcing Johnson Elevator ES#2 IH#8 IH #7 Seagate Hewlett-Packard UPS Hewlett-Packard UPS IH #6 IH#5 IH #4 Cross River Align Tech IH#1 IH #2 IH #3 ES #1 American Connector Case / Other Info. Assignments Due Professor Stephen M. Gilbert OM 367: Strategic Supply Chain Management, Spring 2013 page 6 OM 367: DETAILED COURSE OUTLINE Introduction to Supply Chain & Ops Strategy Van Mieghem (VM): Chapters 1 & 2 Competitive Cost Analysis American Connector Capacity Sizing VM Chapter 3, Appendix B: Newsvendor Review (as necessary) Capacity Sizing Capacity and Inventory Planning IH#1 Capacity and Inventory Planning IH #2 Sales and Operations Planning Cross River......

Words: 3965 - Pages: 16

Premium Essay

Is the Australian Governme

...Is the Australian government effectively making alterations within the Australian Legal System for the benefit of Indigenous Australians? Introduction The Indigenous Australian population consists of people of Aboriginal and Torres Strait Islander descent. Prior to European settlement in 1788, Australia was occupied by over 750, 000 Indigenous Australians who spoke 700 languages between them. However, the number of Indigenous people in Australia has transformed since the devastating impact the European settlers had on Australia’s indigenous Australians. They were exposed to new diseases and violent conflicts resulting in a significant number of deaths. Consequently, today Indigenous Australians make up only 2% of the entire Australian population. In 1788, the European colonists settled into Australia as James Cook enforced the doctrine of terra nullius because he believed that it was, ‘no one’s land’ during his journey around Australia in 1770. The cultures of the Indigenous Australians have changed over the past 227 years, as the European colonists of Australia caused very prompt changes to the Aboriginal society and the ways in which they lived. Whilst a number of alterations have been made to the Australian Legal System for the benefit of the Indigenous Australians, they continue to fight to have their rights documented and acknowledged by the Government and the people of Australia. This paper will evaluate the......

Words: 1814 - Pages: 8

Free Essay

Australian Education

...An agenda for Australian higher educ ation 2013–2016 a smarter australia Universities australia An agenda for Australian higher educ ation 2013–2016 a smarter australia This work is licensed under a Creative Commons Attribution-NonCommercial -NoDerivs 3.0 Unported License. Further inquiries should be made to the Chief Executive: GPO Box 1142 Canberra ACT 2601 Ph: +61 2 6285 8100 Fax: +61 2 6285 8101 Email: contact@universitiesaustralia.edu.au Web: www.universitiesaustralia.edu.au ABN: 53 008 502 930 ii universities australia Contents Preface 1 Summary 3 Vision 6 Policy context 1 Increase Australians’ university participation 8 13 2 Develop Australia’s globally engaged university sector 25 3 A powerful research and innovation system that drives economic and social progress 35 4 Efficiency, investment and regulation 49 Appendix: Development and consultation process 64 Notes 65 Tables Table 1: Gross expenditure on research and experimental development by sector, 2008–09 38 Table 2: Expenditure on research and development as a proportion of GDP, Australia and the OECD, 2008 38 Figures Figure 1: Increase in low SES domestic students in higher education, 1992 to 2011 15 Figure 2: Australia’s benefits from research 37 Figure 3: Commonwealth per student funding, 1989 to 2010 55 Figure 4: Public investment in tertiary education as a percentage of......

Words: 24217 - Pages: 97

Premium Essay

Australian Beverages

...And deservedly so. Despite her credentials, Sue Morphet took a walloping pay cut from her predecessor, to the tune of keeping many Australians in jobs for longer than they otherwise would have. This is not, and should not be an issue about Sue Morphet. Pacific Brands had no choice but to move their manufacturing overseas. Had they not, Bonds, and the company's other iconic brands would disappear from the Australian landscape. Shifted Mfg base to China – to offset high local mfg costs. - Reduced/streamlined a number of brands- More product focus- Less than 100. - Cost cutting measures introduced – shutting down 10 local factories and cutting 1800 jobs. - Reducing cost base, focusing on margin and bedding down new systems and processes across the company. Despite all the criticism and challenges she faced as a surgical leader, especially with respect to job cuts, she was able to achieve the turnaround for Pacific brand. MODULE 5 : MAKING STRATEGIC CHOICES EVALUATING STRATEGIC OPTIONS : With reference to Pacific Brands 1. APPLICATION OF RUMELT’s EVALUATING CRITERIA : ( pg 5.17) Four Components: a) External Consistency: Industrial Globalization was leading many local manufacturers to shift work offshore to take advantage of lower cost options. Pacific Brands was one of the last of the Australian producer still having the local manufacturing base. Sue Morphet’s strategy to move production to China perfectly fit the......

Words: 744 - Pages: 3

Free Essay

The Australian Dairy Industry

...pwc.com.au The Australian Dairy Industry The Basics The Australian Dairy Industry From family farm to international markets Key points œ Australia is a small producer of milk but is the worldfs third largest dairy exporter as 50% of production is exported. œ The Australiafs dairy industry is Australiafs third largest rural industry, ranking behind wheat and beef, and has a gross value of $4 billion. œ Australia produces a range of dairy products including milk, milk powder, yoghurt, butter and cheese. œ The Australian dairy industry is concentrated in the south-east of Australia, Victoria is the largest production state, however other states have significant dairy industries. œ Victorian production is typically seasonal and enters the export market which makes it prone to volatile global prices. Other dairy production areas (i.e. much of NSW) supply the domestic market which requires year-round production. œ The dairy industry is heavily reliant upon water availability; the industry is currently facing uncertainty over water policy. œ Since deregulation in 2001, the industry has undergone rationalisation. This has left a core of efficient producers that are able to compete against international competitors who are heavily subsidised. Contents Key points i 1 History of the industry 1 2 What and where 2 2.1 Map of production 2 2.2 What is produced where 2 3 Challenges and advantages 3 4 Major markets 4 5 Milk and its products 5 5.1......

Words: 4554 - Pages: 19

Material Handling | Nerf War: First Person Shooter 9 | Red vs. Blue