Analysis and market view (forecast)

Commonwealth Bank of Australia is the leading provider of financial services in Australia. The bank also offers retail, fund management, insurance, superannuation, institutional banking, share broking products and investment services (Commbank, 2018a). The main objective of the report is to explain the market view concerning the behaviour of two currency pairs over the next three to six months. It will also include trading strategies that will be undertaken for maximizing the profit of the bank. AUD/USD currency pairs will be taken because an Australian bank will be examined and US dollars is considered to be one of the strongest currencies in the world. The current and future market conditions will be examined in order to understand the exchange rates of the currency pairs. The analysis of the economic factors will also be determined that influences the exchange rates. The devise trading strategies would be implemented for the next six months on the basis of the market view. The Commonwealth Bank of Australia will use the strategy for making a decision which currency to buy or sell. The report will appropriately depict the market analysis, trading strategies and concluding the main theme. The implementation of appropriate strategies can assist an organization to overcome problems in an appropriate manner.    

The demand level for a currency imposes a significant impact on the market price. For example, if people want to purchase AUD/USD and then sell it then the value of AUD would go up. The increase in the selling of AUD/USD explains that AUD value would go down. The AUD/USD shows that amount of US dollar is needed for purchasing an Australian dollar. The changes in the economic factors of a nation impose significant impact on the relationship between the values of two currency. If a decision is taken by Federal Reserve to boost the economic growth of the country then the Australian dollar would depreciate in relative to the US dollar. However, there are many factors that assist in determining the strength and weakness of a currency. The economic growth, high volatility and increase in the manufacturing activities in US lead to increase in the value of Australian dollar. It is due to the close link between the commodity prices.

The AUD/USD is considered to be one of the well known currency pair used for carrying trades. The traders are attracted towards the currency due to the rate of exchange fluctuations. However, the values of these currencies are fluctuated due to the global market environment. It is also determined that the relationship between the Aussie and US dollar is always not predictable. Thus, the investors and organizations should implement appropriate strategies in order to understand the future value of these currencies. The economic factors influence the exchange rates of the currency pairs (AUD/USD). The factors that have been determined and examined are as follows:

Decrease in global growth

The decrease in global growth

The AUD/USD has come under pressure due to the decrease in global growth. It is expected that the AUD will lose its value in relative to the USD. It is also seen that during the increased volatility period in the market leads to falling in the Australian dollar. The US dollar is considered to be reserve currency in the world and government bonds of US are considered to the safe investment. Thus, when there is a high risk in the financial markets than the demands of these bonds increases (Commbank, 2018b).

Commodity prices

Australia heavily depends on the trade activities for developing its economy. The commodities such as coal and iron ore are considered to be some of the largest export products from Australia. The decrease in the prices of these commodities can lead to a sharp decline in the trading activities of Australia (Forexct, 2018). The trading activities are referred to the ratio of the prices of export to import estimated by the Australian Bureau of Statistics. It is expected that the slowing demand will lead to a falling in the price of these resources. It will result in a decrease in the demand of the Australian dollars because the currency will not be used for purchasing the resources. The weakness or strength of the AUD/USD currency also largely depends on what is impacting the value of these resources. Therefore, the fall in the price of these commodities would lead to the fall in the AUD in relative to the USD (Rollins, 2016).  

Interest rate   

The change in the rate of interest affects the value of a currency and also its exchange rate. The increase in the rate of interest causes the currency of a country to appreciate which is because the higher rate of interest provides higher prices to the lenders. Thus, it results in the increase in the foreign investments which causes an increase in the exchange rates. It is expected that the differences in the rate of interest between the Reserve Bank of Australia and the Federal Reserve would impose a significant impact on the exchange rate of AUD/USD. The Australia economy at present is functioning well which is considered to be a positive sign. It is expected that the growth of the Australian economy will increase the value of AUD in relative to USD (Top Rated Forex Brokers, 2018).

Commodity prices

Inflationary Pressures

The increase in the price of the commodities leads to an increase in inflation within the economy. The inflation rate is to be managed by the government with the application of appropriate strategies. The inflation also imposes significant impact on the growth and trade of the organizations in the global market. The fluctuations in the market impose significant impact on the foreign exchange rate of the currencies. However, the inflation rate would not be high in future but it can affect slightly the value of the currency. The slight increase in inflation can depreciate the value of the Australian dollar against the US dollar (Ross, 2018).

Asian currencies

Australia exports three-quarters of its products to Asia and the Australian Dollar is often considered as the proxy for the continent. If the currencies of Asia are under pressure then it imposes an impact on the exchange rate of AUD/USD. The development of the economy of China means an increase in the purchase of the Australian resources that raise the price of these commodities. Thus, many investors attracted to the Australian dollar during this period. It is expected that the economies in Asia will grow which would appreciate the value of AUD against the USD (Hsing, 2015).     

The determination and evaluation of devise trading strategies will assist the Commonwealth Bank of Australia to decide which currency to buy or sell. The proactive trading strategy explains acquiring a higher position before the release of the data by making a decision on the basis of the forecast results. The reactive approach explains entering the market after the publication of the data. The mixed approach can also be used by the organization (Carbaugh, 2011). The Commonwealth Bank of Australia can make a decision on the basis of the forecasted result. It is forecasted that the US dollar will remain consistent in comparison to the Australian Dollar for the next three to six months. The forecasted results are based on the past evidence and it cannot be guaranteed that the performances of these currencies will be the same as forecast. However, the Commonwealth Bank of Australia should make a decision on the basis of the forecasting results in order to overcome any kind of risks that may arise.     

The timing of trading the currencies can also make differences in making profits at the end of the day. The time periods offer higher volatility levels and volume requirements for generating substantial profits. The bank would get the highest volume and largest daily moves during the Australian working hours and during the active trading hours of US (Valdez and Molyneux, 2016).  Thus, the Commonwealth Bank of Australia can carry out its trading activity between 6:00 to 8:00 GMT and 00:00 to 2:00 GMT. The gathering of data and information can also assist to make decisions. The daily charts and historical price charts can be used for making the decision.  The bank cannot make assure that the decisions will provide benefit. However, the chances of getting benefits are considered to be high with the implementation of such strategies (Day Trading, 2018).  

Interest rate

The resistance or support can be a diagonal or horizontal line but the point depicts the price has been revered off for at least two times. It consists of the starting point of resistance/support line. The trade set up of the organization need to take place slightly below or above. The resistance and support directly whether the organization should be ready for carrying out it is trading because a breakout or reversal can be fast approaching (Dasgupta, 2010). The breaking of price above the consolidation then the organization can carry out its trade. On the other hand, the movement of price above the consolidation means the organization should not carry out it’s trading.       

The implementation of risk management is also considered to be very much important for an organization. The determination of risk parameters will also to overcome risks that may arise in future. The forecasted results have depicted that the AUD will more likely to depreciate against USD in future (Marshall, 2013). Thus, the risk management strategy needs to be based on the estimated forecasting result. The trading of AUD/USD produces substantial profits consisting of rich volatility and liquidity. However, the tough competition in the market creates fluctuations in the trading activities. The bank needs to be aware of both the interest rates and monetary policy set by the RBA and the Fed because these factors make huge fluctuations in the foreign exchange market. The technical analysis consisting of news and real-time chart can be capitalized on the bearish or bullish patterns (Naas and Lysne, 2010).

The Commonwealth Bank of Australia has to make the decision of buying or selling the currencies on the basis of the forecasting result. For example, if it is expected that the Australian dollar will fall in relative to the US dollar then the Commonwealth Bank of Australia should utilize the Australian dollars for purchasing the US dollars. The Commonwealth Bank of Australia would sell the USD with the aim of gaining more AUD. The bank would focus on maintaining a balance in the foreign exchange market as it is a price maker (Steele, 2009).         

The US dollar is expected to remain firm for the next three to six months. The spread of AUD/USD is 1.3-9.1. It is expected that the currency would depreciate then the spread would be 1.10-9.8.  It will assist in keeping the profit margins similar. The Commonwealth Bank of Australia can face problems while trading in future but the implementation of strategies will assist to gain profit for the bank (Viney, 2011). The bank has to understand the market in an appropriate manner before making the decision of purchasing or selling the currencies.

Inflationary Pressures

Conclusion

The forecasting result has depicted that the chance of depreciation of Australian dollar is more than the US dollar. It is expected that the US dollar would remain firm for the next three to six months. The fluctuations in the global market will lead to a falling in the value of the Australian dollar in comparison to the US dollar. The devise trading strategies need to be implemented by the Commonwealth Bank of Australia in order to meet the needs of the clients. The development of the economy would lead to the development of the organizations and people of the country (Tavidze, 2007). Thus, it is the responsibility of the major financial institutions to maintain a balance within the market. The bank can face difficulties while implementing trading strategies. The risk management strategies can assist to overcome the risks and gaining maximum benefit from the market. The management of Commonwealth Bank of Australia should understand the market situation while implementing the strategies and focusing gaining maximum benefits.

References

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