In this article, you will learn how to trade AUD/USD, including the basics of AUD/USD in the forex market, and the key factors that influence the AUD/USD Forex pair.
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When reading a quote or a price in the AUD/USD pair, you will see a price such as 0.7115. This means that the Australian dollar is worth US$0.7115 at that moment. When looking at Forex pairs, the price that you see is always the value of the first currency in the second currency. In other words, if you were to fly to New York from Sydney, and you exchanged one Australian dollar for one US dollar, you would receive slightly over $0.71.
The Australian dollar, known as the Aussie, is the currency of Australia. In the past, the Aussie has strengthened as a high-interest rate currency as well as a commodities resource boom. It was favored by many investors. Now the Australian dollar is less attractive due to lower interest rates, and the resource boom is a thing of the past, the attention is not as good as before.
However, there is little uncertainty about Australia's politics and economy, and it is considered a low-risk currency.
The following is a brief introduction to the characteristics of the Australian dollar.
●Representative currency of resource country
●One of the most popular currencies in the world
●Easy to be influenced by China
To begin with, it’s one of the major currency pairs in the Forex world. This means that it is one of the top six markets as far as volume is concerned. This means that there are plenty of orders in the market to keep it nice and liquid, meaning that you can get in and out of the market rather easily.
Furthermore, it typically has a reasonably tight spread, meaning that the difference between the price buyers are willing to pay and what sellers are willing to sell for is typically very small. That suggests that it’s good for day trading, just as it is good for longer-term positioning.
Furthermore, Australia is a major economy and is easily understood. With an economy like Australia’s, you can have a relatively straightforward look at what drives it going forward. A well-developed pair of economies like Australia and the United States means that you have easy access to economic figures and plenty of research.
The characteristic of the Australian dollar is that it is the country with the largest export. Most of the exported commodities are iron ore and coal, which are easily affected by the commodity market. China also has a great influence on Australia. When trading the AUD currency pair, it is better to keep an eye on China's economics as well as commodity markets.
It can be seen that the latest AUDUSD trading volume is ranked 4th. High trading volume means stable prices and high liquidity. Trading volumes are low and prices tend to move sharply.
This is because, in the forex market, the price is determined by who wants to buy and who wants to sell. That is to say, when there are many participants in the market (large trading volume), orders can be fulfilled immediately, so the price movement will also be stable.
AUDUSD trades in smaller volumes than EURUSD, so there is a risk of sudden price movements and sharp swings when trading AUDUSD.
The Australian economy is a highly developed market economy. As of 2018, it became the country with the largest median wealth per adult. It’s the 13th largest economy in the world and is heavily influenced by the export sector, specifically commodities.
Australia has not known a true recession for several decades, as it is a commodity-producing economy that has as its biggest customer China. As the Chinese economy has exploded over the last couple of decades, the Australians have been supplying China with iron, aluminum, copper, and many other hard materials. This has not only benefited Australia due to the massive manufacturing sector on the eastern seaboard of China, but also the massive explosion in construction which uses many of the same commodities.
Australia and China are closely related, and the price fluctuations of the Australian dollar are easily affected by the Chinese economy.
As Australia is one of the largest exporters of gold in the world, that also comes into play when looking at the Australian economy. Many currency traders use the Australian dollar as a proxy for not only China but for the gold market as well.
A little bit lower on the ladder of importance would be the copper market, which has a major influence on the Australian economy, and therefore the Aussie dollar.
As mentioned previously, one of the biggest influences on the Australian economy is whether or not China is growing. At this point, trading relations have come into play due to the fact that the United States and China are in the midst of a trade war, and this causes a significant amount of collateral damage when it comes to the Australian economy. This of course is reflected in the value of the Australian dollar as 2019 has shown.
Interest rate differential
Also, as with any other currency pair, you will have the interest rate differential. Typically, the Australian economy offers higher interest rates than the United States, so that does of course influence the pair typically to the upside. However, it should also be noted that higher interest rates typically mean a “riskier economy”, so therefore when traders are nervous, they will typically short the Australian dollar against the US dollar, as the US dollar is the “world’s reserve currency.”
There are a plethora of commodities to come out of Australia that has a major influence on currency valuations. As an example, the copper producers in Australia that export to various countries around the world will need to see Australian dollars for payment. That forces those importers to go into the Forex markets and exchange local currency for the Australian dollar, driving the value of that currency higher. Through the Forex markets, the easiest way to do this is through the US dollar, and that should push the Australian dollar higher. However, if demand for the various hard commodities falls, that will mean that demand for the Australian dollar will fall as cross-border transactions will slow down.
Inflationary pressures will have a major influence on the currency, and this will be the same not only in Australia but in any other country around the world. However, if there are concerns about inflation, the Australian dollar can get a bit of a boost due to the fact that it is so highly correlated to gold which is a hedge for inflation.
The gold correlation with the Australian dollar is very strong because Australia is one of the world’s leading gold exporters, and therefore it works right along with the same way commodity correlations work with the Australian dollar.
Ultimately, the gold miners in Australia will need to be paid in those same Australian dollars, so Forex traders will quite often use the Australian dollar as a proxy for buying gold. Over the longer term, gold in the Australian dollar does tend to move in the same direction.
The Australian dollar also has correlations with other commodity-based currencies. The most obvious one would be the New Zealand dollar, as the New Zealand economy is very similar to the Australian economy, being highly sensitive to Asia. While Australia provides iron, copper, gold, and other hard commodities, New Zealand will provide softer commodities, mainly agricultural.
In other words, the more that Asians are buying in general, the better off both of these currencies do. Over the longer-term timeframe, both the Australian dollar and the New Zealand dollar should move in the same direction against the US dollar, and other currencies.
★ US CPI - Consumer Price Index indicator in the United States suggests inflationary pressures in the United States. Remember, the more inflation in a country, typically the better off the currency does as higher rates will more than likely be on the way. If CPI in the United States is strong, it typically is good for the US dollar.
★ Chinese PMI - Purchasing Managers Index indicator in China suggests whether or not businesses are buying more input for manufacturing. For example, a company that does not see a lot of strength and sales down the road will not be buying more input materials. Obviously, the exact opposite is true as well. The higher the number in China, the better the Australian dollar will do.
★ Federal Reserve/RBA Minutes - Meeting minutes from central banks quite often have a strong influence on the underlying currency, and as a result, they are parsed by traders to get an idea as to what the central bank is thinking. The more aggressive they seem as far as rate hikes, the better it is for the corresponding currency.
★ Australian Inflation Figures - CPI and other inflation figures out of Australia will have a strong influence on the Australian dollar itself. The higher the number, the better it is for the Aussie dollar.
★ Chinese Import Data - Import figures in China are particularly interesting as they give a “heads up” as to whether or not the Chinese economy is growing, and therefore whether or not there is going to be demand for construction materials, and perhaps manufacturing materials. The more the Chinese import, the more likely it is going to drive up demand for the Australian dollar.
★ US GDP - Gross Domestic Product figures coming out of the United States will give an idea as to how the US economy is performing. The stronger the GDP figures are out of the United States, the better it is going to be for the US dollar.
★ Chinese GDP - Chinese GDP figures will greatly influence Australia because China of course is its biggest customer. Much like a large corporation, the better that the customer is doing, the more Australia will do in commodity sales. Obviously, a stronger number will be good for Australia, even though it is Chinese-based.
★ Australian Housing Data - Australian Housing Data is a sign of how the Australian economy is performing. If the Australian housing market is doing well, that means that the economy is doing well. This obviously will be good for the Australian dollar on a higher than expected number. That being said, it is a bit of a secondary figure.
★ US Dollar Index - The US Dollar Index is a measure of overall US dollar strength, and while the Australian dollar is a relatively small portion of this index, the stronger that the US Dollar Index is, the better off it will be for the US dollar against any currency, let alone the Australian dollar.
Generally speaking, the ways of investing in Australian dollars are mainly divided into bank deposits and forex margin trading. In terms of flexibility, leverage, cost, etc., forex margin trading is nothing more than a better choice.
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✅ Use leverage to trade efficiently from small capital
Forex trading can use leverage flexibly and can start trading from small capitals. Leverage can also improve capital efficiency. For example, when you got a $10 gain without leverage, but with 200x leverage, you will get a gain of $2,000. However, you also need to know that leverage can also lead to huge losses
✅ In principle, you can trade 24 hours on weekdays
In principle, forex can be traded 24 hours a day (excluding Saturday and Sunday). Everyone busy with work, housework, and childcare can trade according to their lifestyle.
✅ Earn Swap interest
The interest rate differential between the two countries is also known as “Swap interest”. Forex trading can benefit from it. For example, if you sell Japanese yen with a low-interest rate and buy South African currency with a high-interest rate, you can earn the interest rate difference between the Japanese yen and the South African dollar. However, if you buy Japanese yen with a low-interest rate and sell South African currency with a high-interest rate, you need to pay an interest rate.
✅ As a hedging tool against other investments
The trader can both buy and sell forex pairs. many traders use currency trading to hedge against other investments. For example, holding stocks brings you huge losses in a bear market, if you trade forex, even if the market is in a downtrend, you can go short and get a profit. In this way, you can hedge for other investments.
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