Accounting Assignment Paper on Transformational Leadership Theory

Transformational Leadership Theory

Abstract

            In the last five years, the general trend of capital and labor mobility in Australia has had a major implication on the country’s exchange rate system. Variable exchange rates combined with high level of capital and labor mobility has led to a positive speculative boost resulting from fundamental policy consistencies. Australia has worked on balancing the combination of capital and labor mobility with exchange rate fixity to promote its currency (The Australian dollar Buoyant, 2013). The availability of US Dollar reserves in Australia is also an important factor that has reduced the risk of speculative attacks of the Aussie Dollar and promoted the country’s macroeconomic policies. Sustainability of public finances, as discussed by Cheol S. Eun (2009) is an important factor in this regard.

Transformational Leadership Theory

Introduction

The Australian dollar looks like the US dollar ($) and has a code denoted as (AUD). This currency is the focus of this paper. This dollar is the popular currency used in Commonwealth Australia, including the Norfolk Island, Christmas Island, Cocos Islands or the commonly referred to as Keeling Islands, and the independent Pacific Islands states of Nauru, Kiribati, and Tuvalu (Jackson, et al. 2012). It is however abbreviated with a dollar sign to distinguish it from other currencies. A dollar is an equivalent of 100 cents.

Currently, the Australian dollar accounts for about 7.6% of the world’s daily share, making it the fifth most traded currency behind the US dollar, the sterling pound, the euro, and the yen. Commonly referred as the “Aussie” by foreign-exchange traders, this dollar is popular with major world’s currency traders because of several factors; these factors will be explained in this paper. This paper also looks at movements of Australian Dollar /US dollar exchange rate and provides some prospects for this currency for the next year.

The Australian Dollar /US dollar exchange rate refers to the rate at which a unit of the Australian Dollar is exchanged for the US dollar. The Australian Dollar (AU$) has experienced a floating exchange rate over the last five years (Eun & Resnick, 2009). The exchange rate may fluctuate by either appreciating or depreciating in order to maintain the market exchange equilibrium. An appreciation refers to the rise in purchasing power or the value of the AU$. Depreciation on the other hand refers to the decline of value or the purchasing power of the AU$. The appreciation in AU$ happens when the demand for the AU$ in the exchange market exceeds the supply. This is caused either by a decrease in supply or because of an increase in demand. A rise in demand may be due to a rise in world growth, which leads to an increase in demand for the Australian exports (Viney, 2007).

AU/US dollar exchange rate over the last 5 years

The movements of the exchange rate for the AU$/$US over the past 5 years has been subject to the machinations of the central banks, the governments, investor needs, the speculator’s instincts and possibly, although not particularly, nation’s economy state. Factor trade and the degree of output between the trading economies are important in maintaining the fixed exchange rate for major economies (Melecky, 2008).

2008/2009 Australian dollar exchange rate movements

Back in May 2008, the Australian dollar exchange rate was around 95 US cents. Bill Evans, the Westpac’s chief economist predicted then that the Australian currency would reach parity with the US dollar over the coming one year, i.e. By May 2009 (Eun & Resnick, 2009). He noted that the Aussie dollar would become strong over that period owing to a single most vital contributor, which he noted as a weaker US economy that was being estimated then by the interest rates market and the currency. However, the prediction turned out to be opposite as by March 2009 one Aussie dollar was worth 65 US cents. This is represented in the graph 1 below:

Graph1.

What is interesting is that the America’s economy declined during that period. The global financial crisis was strongly felt in America and lead to a parlous financial state in the country (Reserve Bank of Australia, 2013). However, Evans was right in predicting these factors but contrary to his prediction, which would also be an exchange-rate flub for any economist, the US dollar became strong owing to0 one major contributor. The contributor is that the US dollar attracted a high degree of investors, as it becomes a safe haven for them thereby appreciating against all other major world currencies. Based on this example, it is important to note that logic does not apply when predicting the exchange rate over the coming given time.

2010/2011 Australian dollar exchange rate movements

The Australian dollar traded at a record parity with the US dollar since it first became a freely traded currency. The Aussie dollar traded above US$1 for a sustained period of days in November but depreciated around that mark into 2011. However, on 27 July 2011, the Australian dollar reached an all-time record high of the dollar trading at a $1.1080 against the USD.  Sources: (Reserve Bank of Australia, 2013)

Factors that contributed to the appreciation of Australian dollar against the US dollar over this period of time as noted by economists and speculators is the sovereign debt crisis that hit Europe around this period and Australia’s strong ties with powerful Asian economies and in particular China who are their material importers (Reserve Bank of Australia, 2013). These factors are explained in details in answering question c below:

2012/2013 Australian dollar exchange rate movements

            The 2012-13 budget predictions was that the exchange rate would ease from a record post-float high owing to the possibility that Reserve Bank of Australia (RBA) would lower its interest rate. The predictions by economists such as Wayne Swan was that a surplus move would enable the lowering of the interest rates and thus ease the exchange rate during a time the exchange rate was high. Rightly, so, in June 2013 the RBA had lowered the cash rate by 50 basis points and lowered it again in July 2013 to 3.50 per cent. However, the expectation and prediction was that owing to this cash rate lowering by the RBA, the exchange rate would fall and opposite to this prediction, the exchange rate went up as demonstrated in the graph below.

Graph 2

Key Factors that have affected the Australian Dollar

In this section, this paper provides some evidence based details of the Australian Dollar against the US dollar exchange rate over the last 5 years. In doing this, the paper briefly explains the significant movements that have been observed over this period. The three Gs’ represented in this paper namely Geology, Government Policy and Geography have been significant in the developments of the movements of the $Au over the past year. However, it is important to note that Australia’s dollar is counter-cyclical and volatile in an uncommonly manner (Reserve Bank of Australia, 2013).

Most of the major world economies that rely on Optimum Currency Area (OCA) factors as well as Capital Openness factors. Compared to these major economies, Australia still has a low production of manufacturing exports. The major Australian exports go to Asian economies as discussed previously in this paper. This means that Australia have a certain level of independence from other major economies of the world. The current health of the AU$ is closely attached to the commodities prices and the volatility that the Australian economy has created in the past.

The significant movements of the $Au over the past year as demonstrated in the information provided above, has been established by several key factors that have affected the currency.   These key factors are presented as the 3 G’s denoting Government policy, Geography and Geology (The Australian dollar Buoyant, 2013). These three factors has had a great impact of the Aussie dollar factor has influenced the speculation of the currency or in other words the outcome of the currency has been expected over this time. 

Geology

Geology refers to the wealth of natural resources available in Australia including oil, agricultural products, gold, diamonds, uranium, iron ore, nickel and coal. These natural resources are in high demand by other countries and acts as the basic commodities of export and trade with other major world economies. Commodities (both metals and grains), and other related factors such as crop planting, harvests, weather, mine output and metal prices has a major impact on the movement of the Aussie dollar. Data related to geology is not hard to find and can be obtained from Australia’s Bureau of Agricultural and Resource Economics and Sciences (ABARES). This is an independent research organization within the Australian Government Department of Agriculture, Fisheries and Forestry. ABARES is responsible for producing regular reports freely available on the internet.

 Besides the ABARES, there are many other financial information sources such as Wall Street Journal and Bloomberg where investors have been able to access information freely. Such investors have been able to take note of other related information such the employment, interest rates and daily news flow in the particular country. Details that include such issues as the scheduled meetings of the central bank new government policies have had a significant impact on the exchange rates of the Australian Dollar /US dollar. This means that investors were adequately equipped with relevant information pertaining to investing in Australia and by this, their response was instrumental in the speculation of the currency that demonstrates that the outcome of the currency was expected.

Government Policy

Government policy especially pertaining to macroeconomics has acted as the “big picture” for the overall performance of the Australian economy (Apergis, 2014). The Australian government has set up policies that are of much importance in influencing the economy of that country. The policy regime in Australian has been a compatible one encompassing monetary, fiscal and sound exchange rate policies, and the related institutional framework which has been instrumental in the success or the of the macroeconomic policies in the country. The good macroeconomic policies in Australian have acted as a signal to investors worldwide on the reliability of future performances of Australian’s economy thereby influencing such investors to place their money in the Australian’s assets. This in turn has influenced and increased the demand for the country’s currency thereby making the outcome of the currency’s movement to be expected.

Geography

Geography refers to the positioning of the Australian economy, which has enabled it to be a choice trading partner with numerous fast-growing Asian economies (Madura, & Fox, 2011). The trading partnership between Australia and these economies involves trade in goods and services that has led to a stable economy. The result of the stable economy has acted as an incentive into the determination of the Australian currency showcased by the movement of the currency’s exchange rate. That said, China’s economic developments have had a major impact on the Aussie dollar.  China and India are both huge importers of Australian commodities and Australia on the other hand imports machinery and other consumer goods from China and India.

Significant industry operating in the Australian Dollar

A significant industry operating in the Australian currency that it is bound to be affected by the movement of this currency is the alcohol industry (Eun & Resnick, 2009). The factors identified in part c, explains the currency risks that are faced by companies operating in this industry. While a depreciating Australian dollar is positive for parts of the Australian economy, simply because it makes exports cheaper, that does not automatically translate to a boom for the alcohol sector. The price of alcohol may not be the most significant drivers of Australia’s exchange rate as compared to other commodities such as mining. However, based on the analysis of the past two years, the linkage of the alcohol prices has been broken. While the alcohol prices have decreased owing to a saturation and production of quality cheaper brands of wine in the alcohol industry, the dollar on the other hand stayed up (Iglesias, 2012). The falling of the dollar may help companies operating under other industries operating in under the Aussie dollar. This can however happen if the alcohol prices have gone down due to saturation of the domestic market in the country. This means that the companies’ profits/company tax revenue would not improve because, logically, their product’s prices will still be going down (Jackson, et al. 2012). Several actions can be taken by companies operating under the mining industry to reduce the exposure that they are currently facing. The first action is Market Diversification (Alliances) by companies operating under the alcohol industry in Australia. These companies should endeavor to enlarge the company’s business from the domestic market to international market. The companies should insist on searching business cooperation not only locally but abroad as well to achieve high effect service provisions (Karfakis, et al. 2013).

Such an expansion would definitely improve the performance of these companies in the stock exchange. However, a thorough research and careful planning is another action that the companies need to do in order to ensure the right timing.

Predictions for 2014/2015

The 2012-13 prediction by the Treasury was an estimated exchange rate of $US1.03. Indeed the exchange rate went down from March 2012 to June 2013 owing to the interest rate cuts and the budget (Madura, & Fox, 2011). This is illustrated in the graph 3 below:

However, that does not automatically mean that the exchange will continue to fall in the period 2013-14. The exchange rate as on Sunday 19/01/2014 was 1 AUD to 0.87735 USD the dollar and has the Aussie Dollar has fallen to 0.9049 USD as on Tuesday 18th February, 2014. With the AUD now based at that level, it demonstrates that the Treasury has gotten it right because since March 2013, the dollar has taken the same path it did in the same period of 2012-2013 (RBA, 2013).

The prospects of the Australian Dollar in the period March 2014 to march 2015 would not be very different from the exchange rate that has been witnessed during the same period last year. The difference is that in 2013, minerals prices went up and the US Federal Reserve began an open-ended quantitative easing policy. The Australian dollar this year is likely to depreciate based on preliminary reports that Ben Bernanke will be announcing when the Federal Reserve will terminate its loose monetary policy. If the Federal Reserve does that, the US dollar will appreciate above all other major world currencies. The Australian dollar being one of the most overrated currencies would then be expected that it might fall than the other currencies. However, if this policy is not put to an end, then the Australian dollar is expected to stay at the current historically high level of within 0.86 USD and 0.90 USD (RBA, 2013).

In addition, there has been an inflation of major commodity prices in most developed economies in the past year. Based on this fact, high resource prices have led traders to concerns for the growth sustainability and the health of economies in Europe, Japan and North America. However, as these major world economies are faced with these concerns, the Australian economy in 2013 continued to look healthier (Eun & Resnick, 2009). This places the Australian dollar as an accepted alternative for investors looking to go extensive on commodity exposure in 2014. Most investors are looking for economies that in addition to having a commodity exposure, has Asian resource demand while going moving away from the major world economies mentioned above because they are likely to suffer due to increased input expenditure. Based on these three issues, the Australian currency is likely to remain at the historically high level it is in currently (Madura, & Fox, 2011). This specific issue makes the Australian Dollar a good currency in which to do business in the year 2014/2015 (Reserve Bank of Australia, 2013).  

Conclusion and Recommendations

Besides the effort of the companies that trade in the stock exchange market will need to take in order to reduce their exposure to currency risks involved in the market, the government also needs to take some actions in order to ensure a balanced exchange rate. One of these actions is to control the interest rates and inflation in the country (Bekaert & Hodrick, 2009). This can be achieved by the country’s independence from heavy reliance on commodities and the rather small domestic industrial base in the country. This dependence has in the past led to persistent heavy account deficits for most of the country’s post-world war II economic developments.

 Australia is at an advantage in that it has relatively small amount of debt in comparison to its GDP percentage. However, as aforementioned the major concern in the country in relation to stabilizing the Australian currency is the government spending. Increased government spending over the past couple of years has become a potential concern. The Australian government should therefore get its government spending under control (Melecky, 2008).

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