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Decribe What And How The Forex Market Works In Australia

991 words - 4 pages

The Foreign Exchange Market is the buying and selling of various currencies. The exchange rate of the Australian dollar is the price of 1 unit (1 dollar) expressed in terms of another currency. The 2 most common measures of the exchange rate used in Australia are:*The Exchange rate against the US dollar*The trade-weighted index (TWI)The measure against the US dollar is important because trading of the Australian dollar in the Forex market is highly concentrated against the US dollar.The measure of the TWI is a much more accurate one. The TWI comprises of 26 different trading partners of Australia. Each country has a relative share in the TWI according to the amount of trade it does with Australia. This allows the currency to be measured against many different currencies which give a much more general and accurate exchange rate of the currency as it is an average of all the countries with an impact on the Australian economy. When the AUD is only measured against 1 currency (the US dollar), it can be very misleading because it may be falling against that particular currency but rising against another.Table 1: TWI WeightsAs at September 1997Currency Weight (%)Japanese yen 17.9620US dollar 16.2446NZ dollar 6.9162South Korean won 6.7668Chinese renminbi 5.4598UK pound 5.2845New Taiwan dollar 4.3069Singapore dollar 4.2186German mark 3.9374Indonesian rupiah 3.6225Malaysian ringgit 2.9571Hong Kong dollar 2.8021Italian lira 2.5644Thai baht 2.0273French franc 1.9487Canadian dollar 1.7124PNG kina 1.6493Indian rupee 1.4501Swedish krona 1.2040Belgian franc 1.1802Philippine peso 1.0560UAE dirham 1.0280South African rand 1.0084Netherlands guilder 0.9831Saudi Arabian riyal 0.9158Swiss franc 0.7938Total 100.0000Supply and Demand FactorsWe are used to thinking of a cook as 'supply' and as a customer in a restaurant and 'demand', but in the Forex Market, the same 'person' represents both supply and demand. If you wish to use AUD to buy USD, you represent a supply of AUD on the market and a demand for USD.Currencies follow the same general supply and demand rule.'If the supply of a good increases, prices tend to go down' and vice versa. If the amount of USD offered for sale on the market is increased, the price of the USD in terms of the AUD will fall. If the amount of USD offered for sale on the market decreases, the price of USD in terms of AUD will increase.'If the demand for a good increase, prices tend to go up' and vice versa. If the amount of USD for sale on the market increases, the price of the USD in terms of AUD, will go up. If the amount of USD for sale on the market decreases, the price of USD in terms of AUD goes down.There are many supply and demand factors. A simple supply and demand factor is a person wanting to purchase a good from another country. To pay for this good, a person must purchase the currency in which the country uses and use that currency to pay for the good. This forces the consumer to sell his currency, which creates a supply of that...

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