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Austrian Dollar. Exchange Rates
Business in the Australian securities market is normally carried out in the Australian dollar A$. This is the currency upon which all world major currencies that are in circulation in the Australian market are converted into. The stock exchange market is situated in the capital Sydney and the average table of conversion of the world majors in the last three days is as follows:
United States dollar: 1.0289, 1.0379, 1.0396. European euro: 0.7854, 0.7899, 0.7892. United Arab Emirates dirham: 3.7786, 3.8117, 3.8179
The rates of conversion of these currencies are largely affected by certain occurrences or activities carried out in the markets in which the very currencies are used.
In case of the euro, the euro zone market carries out certain activities that affect the daily exchange rates in the market, a major influencer being the interest rates paid on euro deposits in the markets that use the currency more specifically in the Europe. But one underlying influencer of the rates of currency exchange is normally the availability of the currency in the market, any activity carried out in the market that limits the amount of the foreign currency makes that currency gain value against the local currencies (Alexander & Jorissen 2010).
When the interest rates levied on euro deposits are lowered by a given margin, an example would be from 6.4% to 5.9% this would imply that the amount of the currency available in the market shall diminish and this in turn would make the currency gain more value in the Australian market. Mathematically this resonates as below:
Should there be five billion Euros deposited on the day that the interest on the euro was 6.4%, the total value of the interest on that day would be 320,000,000 Euros in circulation while on the day that the interest rate falls to 5.9% the amount of Euros in circulation would be 295,000,000 Euros translating into 25,000,000 Euros held out of circulation. With the market lacking this amount in a foreign currency, the value of that currency in the country would appreciate in a significant percentage. For the above case the percentage increase would be 0.5% and with this percentage appreciation the euro exchange rate would increase by an average of A$ 0.03946. In reality if this market activity was to take place tomorrow or the day after, then the people of Australia would wake up to the euro exchanging at A$ 0.82866 and this change in the exchange rate would in deed be significant.
The Use of Different Currencies Depending on the Industry in Business
Most markets across the globe use the United States dollar. Some of the large industries that cut across nations that see to the use of the currency include: the oil industry, the transportation industry and the tourism sector. The dollar is then later exchanged into the local currencies while others simply carry out the trade in dollars. As explained in the question one above the amount of a given foreign currency available in a given a market largely plays a role in determining the rate at which the currency is exchanged.
The case being studied is the euro zone more specifically the United Kingdom and Australia thus putting the London securities market and its Sydney’s counterpart under tight scrutiny. Some of the market activities that would lead to an influx of more of a given currency, the euro which is under the currency under study are several key among them being:
The central banks of the countries would open a finance window that would allow a currency of interest be in abundance in the foreign markets (Bines & Thel 2004). This window is determined by the board of governors of the central banks and key market players who must put into consideration the consequences of the window. In most cases the window is opened to allow the locals take advantage of a given Market occurrence such as an introduction of an IPO- Initial Public Offer of a given international firm.
The other market activity that would see to it that the amount of euro is in abundance in a foreign market such as in the Australia is when there is heightened trade between the country and the countries in the euro zone. An increase in the number of tourists leaving the euro zone for the Australia would most definitely lead to there being more of Euros in the Australia’s foreign exchange markets.
For whichever of the reasons above should there occur to be more Euros in the Australian market temporarily, the ramifications of this temporary increase in the currency would be tremendous in the markets. The local currency gains value immediately and this value gained would depend on the level of the increase of the Euros. The appreciation of the currency would affect the foreign exchange either positively or negatively depending on the nature of the business one invests in. Importers would benefit while exporters would count losses. Initially, the one Euro was traded at 0.7892 Australian dollar but with the currency gaining value depending on the level of increment of the amount of the euro this rate would fall to as low as A$ 0.452.
The effects of the A$ 0.3372 would depend on the size of a business that one undertakes in the region. An oil importer whose business scaled up to a billion Euros would by default make a profit A$ 337,200,00 should he trade all the one billion worth oil while the exchange rate still stand. This would be the case while a flower exporter with similar investment would be making losses of similar magnitude (Lane 2005).
In a nut shell, the increase of the European money into a given market, the Australian market and the United Kingdom, affects greatly the stock exchange market of these countries. The availability or scarcity of a given currency makes the local currency to lose or gain value respectively. When a local currency loses value then that means that the exchange rate is high and should it gain value then it means that the exchange rate is low.
The Use of Different Currencies Depending on the Size of the Country
Depending on the size of the country and the size of the money market of a given market, the practitioners would from time to time show preferences for varied currencies for operation. A country with lots of export and import businesses would always prefer the dollar or euro while a country with lots of local companies in operation would always use their own local currencies. A country like Zimbabwe with a currency that is so devalued would have mixed currencies, the very rich and influencers of the money market would always show preference for the foreign currencies most specifically the American dollar while the poor would have no alternative but use the devalue currency.
The amount of domestic currency in circulation is normally dictated by demand for the same. A government with more employees to pay would be compelled to print enough local currency to do just that. However the amount of the domestic money would increase or decrease depending on the activities in the money market. A country like the earlier mentioned Zimbabwe would opt to begin using a foreign currency and that would mean that they would stop printing their own local currencies thereby permanently decreasing the domestic money (Badaracco 2003). Under normal circumstances when a country decides to reduce the amount of the domestic currency this would mean that the amount of the local currency that is kept in circulation is kept watched at a lower amount and most of business transactions are carried out in foreign currencies.
Permanent decrease in the domestic currency would mean that the currency is scarce and therefore would appreciate in the foreign exchange markets. Those looking for the currency would be compelled to spend more so as to obtain the scarce currency. In the foreign exchange markets, the currencies are treated as commodities of trade and their prices set depending on availability.
The long run effect of this decrease would be the fact that the entire nation would switch to using the foreign currency and this would affect certain sectors of the economy either positively or negatively. In the long run the status of the economy would still be obtained and the effect would not be experienced when the economy comes to terms with the introduction of the new currency.
Example: if the cost of producing a bar of soap was A$ 2 yet one euro equal A$ 2.234, then the cost of producing the very bar would translate into one point five euro and the people of Australia would get accustomed to purchasing the soap at that price. This trend liberates the local market turning into it into an international market forthwith.
References
Alexander, B & Jorissen, J 2010, International Financial Reporting and Analysis, oxford university press, oxford.
Badaracco, J 2003, Defining Moments: When Managers must choose between right and wrong, Harvard University Press, Harvard.
Bines, H.E & Thel, S 2004, Investment Management Law and Regulation, Aspen, London.
Lane, M.J 2005, Socially Responsible Investing: An Institutional Investorâs Guide, Euromoney. Aspen Publishers, London.
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