EXCHANGE RATE

Disclaimer: the intention of this article is for intellectual entertainment only, rather than serious economic and financial advices. Any consequences due to actions taken as a result of reading this article, or perceiving representations of this article through a third party, will not be the responsibility of the author.




Exchange rate can be in a simple way considered as a function of demand and supply between two currencies. Considering what money does essentially is to purchase local goods and services, including interest repayments due to savings in banks, an exchange rate really is just a love affair between two economies and the question is who's paying more for it.

Australian dollar plunged in the last couple of days because the world economy melt-down. No, really. Australia is a commodity based economy that sits on resources and energies. The world craves for aussie dollars whenever they want a new building built, or new cars, or railroads, because Australia has loads and loads of them, and what's more, because it is closer to the biggiest consumer of steel, i.e. China, than, say, India or Brazil.

But what happens with the current crisis is that the markets are expecting the economic developments globally to drop and the demand for these natural resources would be the first to plunge. So financial institutions seek for refuge away from commodity based economies and put their money away from the australian dollars to safer havens such as government bonds or precious metals.

The thing with market speculation is that the buying actions are always due to exaggerated greed and the selling actions are driven by blown up fear, so the actualized crash in the dollar value may not have honestly reflected upon reality. But the theory stays. There's no rush immediately to absorb aussie dollars even at these attractive levels, yet. Clouds of uncertainty should be expected to clear in the following week or two.

Some key things to pay attention to:
Oil price, commodity prices, Chinese building sector figures, but a rule of thumb is the oil price, wait for it to stablize, if it ever does.