Exchange Rates and Export Opportunities This Paper

¶ … Exchange Rates and Export Opportunities

This paper compares exchange rates between Australia, Great Britain, and Japan from last February 28th, 2003 and August 28th, 2002. Analysis of where a company could focus its export business based on past current and 180 days forward exchange rate trends and other factors will then be examined. Finally a memorandum to convince management that establishing an export business to one of the countries below is a good idea.

Comparative exchange rates between 4 selected countries and the U.S.

Below are the exchange rates listed by the Pacific Stock Exchange for February 28, 2003 for Australia, Great Britain, and Japan. (Pacific Stock Exchange Website)

Code

Country

Units/USD

USD/Unit

AUD

Australia (Dollar)

GBP

Great Britain (Pound)

JPY

Japan (Yen)

KRW

South Korea (Won)

Below are the exchange rates listed by the Pacific Stock Exchange for August 28, 2002 for Australia, Great Britain, and Japan. (Pacific Stock Exchange Website)

YYYY/MM/DD 2002/08/28

USD/AUD

USD/GBP

USD/JPY

USD/KRW

AUD/USD

GBP/USD

JPY/USD

KRW/USD

Examining exchange rates between the four chosen countries and the U.S.

As can be seen by the charts on the previous page in the past six months (August 28th, 2002 - February 28th, 2003) the dollar has become stronger against the currencies of Australia and Japan while losing strength against the currencies of South Korea and Great Britain. Current geo-political issues, specifically the increasing belligerency of North Korea and the concurrent cooling of relations with the South Korean government are warrant for removing South Korea from the list of possible sites to open new business ventures with, at least in the short-term.

The current exchange rate trend between the U.S. And the U.K. appears to hold steady in the very short-term. However 180 forward rates indicated the market believes that the dollar will gain slightly against the British Sterling and will continue to do so for a 2-year period.

Period Bid Ask Period Bid Ask

Month

12-Month

Source: OZFOREX

http://www.ozforex.com.au/cgi-bin/forwardrates.asp basic economic theory in international trade is that currency depreciation encourages exports, (Blaine, 1996). The GBP/USD rate should continue to favor the U.S. For the foreseeable future.

Great Britain uses an independent floating exchange rate regime. The exchange rate is market determined, with any foreign exchange intervention aimed at moderating the rate of change and preventing undue fluctuations in the exchange rate, rather than at establishing a level for it, (Bank of England, 2003). With this regime financial forecasting for trends and profit potential can be more accurately measured based on real market rates for the Pound.

Other determining factors for focusing the on the U.K. For an export market include the stability of the Government, the relatively high level education and rising discretionary income in it's population and as a foot hold for acquiring markets in Europe.

A brief discussion on the use of exchange rates alone on whether to enter an overseas market:

basic precept of economic theory is that currency depreciation encourages exports and improves a nation's trade balance. (Blaine, 1996) However, currencies began to float freely, more or less, in 1973 thus causing the link between exchange rates and trade flow to become very tenuous. (Blaine, 1996). The rapid increase in international capital flows is one reason attributed to this tenuous condition; capital flows are much more sensitive to minor changes in exchange rates compared to trade flows, especially in the short run. Therefore countries that attempt to boost exports by making their currencies weaker can experience negative results such as large inflows of foreign direct investment, large outflows of foreign portfolio investment and domestic flight of capital. (Blaine, 1996) the growing importance of multinational corporations in determining international trade patterns is another factor. Global production and distribution networks act to replace exports from the home countries of the multinationals thus replacing exports with local production in foreign markets. International capital flow growth, along with the popularity of global-based strategies, have altered the logic of international trade and undermined the basic precept of the impact of exchange rates on international trade flows. (Blaine, 1996). These are factors that should be considered as part of the study for exporting to other countries.

Memorandum:

To Global Marketing Management Team:

Subject: Export Market Potential in the U.K.