Table 1: Inflation rate for US and AU in 2012 to 2017 1
Table 2: GDP growth rate and unemployment rate for AU and US in 2008 to 2017 2
In short term, Australia is facing higher inflation rate (2.9%) than the United States (2.1%), this can lead to the domestic market price increase but not much fluctuation for currency exchange rate. Moreover, Australia has higher GDP growth rate than United States (3.5% vs 2.4%) and lower unemployment rate than US, which are 5.2% and 7.9% in 2013. Therefore, the income will increase in Australia. Australia consumers would spend more on the US imports and the demand for US will increase. The supply of dollars will increase to buy more US products and the value of USD will increase relative to the AUD. In conclusion, we predict that the exchange rate of AUD/USD will decrease in the short term.
In intermediate term, there will be almost a constant decline of inflation rate each year in Australia while that of United States remains fairly constant. The Inflation rate in United States is still lower than Australia. As a result, it is highly unlikely that the interest rate in Australia will increase by a large amount. On the other hand, the interest rate within the United States would be expected to remain quite low. In addition, according to the information from IMF, GDP growth of Australia will be stable at 3.5% while that of United States will increase from 2.4% to 3.5%. Although there is a large reduction in unemployment rate in United States, it is still higher than Australia’s. Therefore, as long as the US Federal Reserve will not implement the monetary policy QE3 in the next few years, the currency of the United States will go up against Australia, but exchange rate of Australia will still be slightly higher than United States in the intermediate term.
In the long term (greater than 5 years), the inflation rate of Australia will drop to 2.4% in 2017 while that of United States...