Topics: Inflation, Purchasing power parity, Balance of payments Pages: 5 (1823 words) Published: December 16, 2012
This report analyzes the trends in the Australian dollar against the Norwegian krone, and attempts to forecast the exchange rate at December 11, 2012 of the Australian dollar/Norwegian krone. We show you how each economy and each countries balance of payments effects the exchange rate fluctuations. We calculate different forecasts using the naïve model, parity conditions method, and technical analysis method. After taking into consideration all of the research and facts presented in this report, we decided that the purchasing power parity was the best indicator for what the future exchange rate would be. Using these conditions we forecasted that the exchange rate at December 11, 2012 will be 5.64132 AUD/NKR. A countries economy can be a key indicator on how the exchange rate will fluctuate in the market. The Australian economy is largely based on the services sector (80% of GDP) ( and natural resources.  The main exports are natural resources, energy, and food.  Australia also has a close trade relationship with China and is negotiating with China, Japan and Korea on a free trade agreement. The GDP growth rate for Australia has fluctuated slightly over the past three years.  In 2009 the growth rate was 1.4%.  The rate rose to 2.5% in 2010 and fell to 2% in 2011(World Factbook).  In 2010 there was an influx of foreign investment which may have boosted the growth rate.  Australia was hit by the financial crisis in 2009 but bounced back quickly after only one quarter of negative growth.  There was a fiscal stimulus package for more than US$50 billion and interest rates were cut to historic lows by the Australian Reserve Bank.  Unemployment peaked at 5.7% in late 2009 and has fallen to 5% in 2011 (World factbook).   Australia has had a negative current account for the past five years with a low of negative AU$69.34 billion (about US$58 billion) in 2007 and a high of AU$26.1 billion (about US$20.4 billion) in 2009 as seen in table 1.1.  Some contributing factors to the high current account balances of Australia include low international competition and heavy reliance on imported goods.  The economy has improved and experts believe that the budget deficit with peak around 4% of Australia’s GDP and perhaps there will be a budget surplus by 2015 (world factbook). Inflation rates in Australia rose from 2.8% in 2010 to 3.4% in 2011.  This may be a response to interest rates being increased seven times by the Reserve Bank of Australia.  Interest rates rose from 3.15% in 2009 to 4.44% in 2010 to 4.55% in 2011 as seen in.  Higher interest rates are more attractive to investors and they will hopefully continue to invest to counteract the negative current account.   Norway is one of the world’s wealthiest economies, with a very strong and stable currency. The Norwegian Krone has a current spot rate of approximately 5.56 AUD/NKR. Over the past ten years the Krone has appreciated overall against the Australian dollar, as shown in Table 1.1. On December 11, 2002 the spot rate for AUD/NKR was 13.01. Over the past 10 years, the strength of the Krone has been mostly on a consistent rise against the Australian Dollar, other than the brief spike in 2008, when Norway was affected by the financial crisis. The value of the currency went from 6.14 AUD/NKR on December 11, 2007, to 10.17 AUD/NKR on December 11, 2008, and then back to 6.34 AUD/NKR on December 11, 2009.

Norway’s gross domestic product has shown substantial growth over the course of the past 3 years. In 2009 the country had a real growth rate of -1.7%. The following year the GDP real growth rate had risen to 0.7%, and in 2011 the rate had reached 1.7%. This is due in part to the rising global demand for gas and oil over the past few years, as Norway is one of the top 10 exporters of each of these resources. (Central Intelligence Agency , 2012)

Data for the balance of payments accounts was only available for the years 2006-2010, shown in table 1.1. The...
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