Is the Australian Dollar Set to Outperform the British pound? (Essay Sample)

Is the Australian Dollar Set to Outperform British pound? An exchange rate refers to the unit value of one currency in relation to another currency value. For example, the value of Australian dollar in relation to British pound can be abbreviated as AUD/GBP. An indication of how many British pounds can purchase one Australian dollar. It should be noted that if AUD increases in relation to another currency the effect is appreciation while if the Australian dollar decreases the resulting effect is depreciation. According to a research by Commonwealth Bank of Australia, the Australian dollar in the coming months, is likely to rise and outperform British pound. This has been driven by the elevated prices of commodities and the changes in central bank policies. AUD has pushed GBP down more than 5% lower throughout the year and a double decline is expected at the end of second quarter thus rising AUD/GBP to 0.60 while pulling the pound to 1.66. The driver for AUD/GBP outperformance is the support of commodity prices towards the economy of Australia while dragging economic activity in UK. Thus due to increased commodity prices and wide interest rate differentials, AUD/GBP has been on the rise. Ever since Russia invaded the nation of Ukraine and imposition of Covid 19 containment measures, the result has been negative net-importing for sterling and UK economy. However, with the elevated commodity prices, this has been a short term stimulant for the economy of Australia, and thus making its currency to gain edge over the British pound. Economic growth Economic growth of any country is determined by the rate of living standards and is measured as growth of real GDP per head. Any country that wishes to stimulate faster economic growth can adopt expansionary fiscal policy which aims at boosting the economy through lowering taxes and raising government spending. The policy helps to boost economic activities of businesses or consumer through money injection into the economy. Inorder to stimulate economic growth, a country can consider raising the living standards in the long run. Raising the real GDP requires labour productivity growth through contributions of technological innovations and physical and human capital stocks. Any country with technical progress enables growth of output without the increase of inputs. Technological innovations can involve research and development systems, importing and copying ideas from overseas or making other technological improvements: this helps in production efficiency and optimum resource allocation within a country. The poorer countries have a position to stimulate their economic growth compared to rich countries as the poor economies have little capital and thus experience greater benefits from any investment amount. The poor nations have other means of catching up through backwardness advantage, where they can import and copy best practices and technological ideas from other nations around the world rather than developing the practices on their own through trial and error methods. Who Gains or Loses at the Fall of AUD Value? In the exchange market Australian dollar, can be bought or sold as a way of facilitating international trade of gods and services. In our case of AUD/GBP, the Australian sells goods or services to United Kingdom, while it pays for goods obtained. At the depreciation of AUD, the exports to United Kingdom will be less attractive thus a loss to Australia. When AUD depreciates in relative to AUD/GBP, less British pounds will be required to purchase one Australian dollar. Thus the Australian goods and services are cheaper compared to overseas .so when the Australian dollar loses its values, the nation of Australia loses as its products becomes cheaper and becomes more expensive for them to export its products abroad. The AUD value is determined by demand or supply of Australian dollars in the foreign exchange market. Some factors may cause a long-term or short-term loss or gain of the Australian dollar. While if AUD gains value, means more British pounds will be required to purchase one Australian dollar, thus its products and services becomes more expensive and attractive for foreign investors, and thus Australian will gain from its exports to UK. How Can RBA Depreciate Further the AUD Value? RBA can use different approaches to further depreciate the currency value of Australia. Through loosening monetary policies and thus encouraging one sidedness in the foreign exchange market. through decreasing interest rates charged on goods and services of Australia. Thus the investors will be unwilling to save with Australia banks compared to UK due to low rates of return offered in Australia. Thus a shift of investors from Australia to UK, encouraging selling of pounds and buying dollars, thus leading to depreciation of the Australian dollar. Loosening fiscal policy can lower the value of AUD further. If RBA lowers taxation, the Australian consumer will be forced to adjust their consuming patterns, while the UK residents will respond by increased consumer spending leading to higher economic growth and inflation levels. Thus with increased inflation, commodities become less competitive, leading to fall in demand for Australian goods and services compared to UK. The reserve bank of Australia may opt to sell reserves of currency and buy rival currencies leading...