FX MARKET

FX Market



FX MARKET

Introduction

FX market is considered as the most perfect market in the world where we can expect to hold the law of one price. The law of one price provided theoretical base for all international parity conditions. International parity conditions can be used to understand the operational behaviour of the foreign exchange market. In a perfect market, all these parity conditions should be held and there will be no possibility of abnormal profit on arbitrage or speculation. The aim of this group assignment is to give you an opportunity to empirically investigate the existence of some of those parity conditions. Factors affecting the foreign exchange market are numerous as inflation rates, interest rates, trade efficiency and countries political stability.

Various countries exchange rates against Australia being taken in order to analyse factors affecting exchange rates and impacts on economy and comparison is done between expected and actual exchange rates.

Discussion

Factors affecting the foreign exchange market

Historical foreign exchange rate for 10 selected currencies against the Australian dollar for the period of 01/02/2011 -29/02/2012

It is being attached in appendix. It shows 10 currencies exchange rate against the Australian dollar. Various countries exchange rates against Australia being analysed and its results are shown in the table attached to appendix. It shows day to day fluctuations in exchange rates.

Graph showing the daily movements in FX rates and Possible Reasons of their movement

United States Dollar

This graph shows that initially U.S dollar was at par with Australian dollar. But with passage of time Australian dollar improves drastically and recently in feb2012 it is on upper side which is around 1 Australian dollar = 1.0816. This improvement in Australian currency is due to its stronger than better job data on the other side U.S dollar faced losses due to huge jobless claims.

Chinese Renminbi

This graph shows that Chinese Renminbi remains to be always below as compared to Australian dollar. In fact with passage of time it went more down as exchange rate increased up. Chinese have some fundamental structural problems yet they are looking for its improvement gradually.

Japanese Yen

Japanese Yen exchange rate against Australian remains to be same with little ups and down due to market fluctuations. This shows that there is no variation in their currencies or vary with same proportions over the period of time.

Euro

This graph shows that initially Euro was better with Australian dollar. But with passage of time Australian dollar improves drastically and recently in feb2012 it is on upper side than previously which is around 1 Australian dollar = 0.8021. This improvement in Australian currency is due to it's stronger than better job data. AUD is predicted to increase more against Euro near future as European currency is loosing confidence among global players.

South Korean Won

This graph shows that initially South Korean Won was better with Australian dollar as recently. Drastic changes occur with South Korean that its currency went down because of their plan of launching missile.

UK Pond Sterling

This graph shows that initially UK Pond Sterling was better with Australian ...