The Australian dollar (AUD) holds a unique place in the world of forex trading. Renowned for its resilience and strong correlation with commodity prices, the Aussie dollar attracts traders seeking exposure to the commodity market. In this comprehensive article, we will delve into various aspects of the Australian dollar, providing forex traders with the knowledge they may need to make informed decisions.

Background on the Australian Dollar

The Australian dollar is a legal tender in Australia, encompassing all its external territories, while it is also accepted for payments in three autonomous Pacific Island nations: Kiribati, Nauru, and Tuvalu. Throughout its long historical journey since 1966, it was initially pegged to the British pound, though in 1983, it transitioned to a floating exchange rate regime. Several key factors shape the AUD exchange rate today.

Internal Factors Influencing the AUD's Exchange Rate and Volatility

• GDP growth: Robust GDP growth may induce higher consumer and business activity, potentially leading to greater demand for the Aussie. Conversely, weaker growth could prompt traders to anticipate a softer AUD.
• Employment figures: Low unemployment rates and significant job creation can enhance consumer confidence and increase spending, potentially boosting the AUD. Conversely, higher unemployment or poor job creation figures may weaken the currency.
• Inflation rates: High inflation may lead to speculation about central bank cash rate hikes, which can strengthen the Aussie. Conversely, low inflation rates may lead to concerns about economic stagnation and can weaken the currency.
• Trade balance: A trade surplus can indicate a strong demand for the country’s goods and services, potentially strengthening the AUD. On the other hand, a trade deficit may raise concerns about overreliance on imports and could weaken the currency.

Foreign Influence

The most impactful foreign data affecting the Australian dollar exchange rate today comes from China and New Zealand.

The AUD and New Zealand Dollar (NZD) often exhibit a strong positive correlation due to their geographic proximity and similar economic structures. When the NZD is strong, it can have a positive influence on the AUD and vice versa.

Changes in the New Zealand dollar’s value relative to the Aussie can affect the competitiveness of Australian exports to New Zealand and vice versa. Strong NZ economic growth may raise the demand for Australian exports, benefiting the AUD.

China is Australia's largest trading partner, and its demand for Australian commodities, particularly iron ore and coal, has a substantial impact on the AUD. Trade tensions or trade agreements between Australia and China can affect the Aussie’s value. Also, when China's economy is growing robustly and its industrial production is strong, it often leads to increased demand for Australian exports, boosting the Aussie. Therefore, economic indicators from China, such as GDP growth, industrial production, and trade data, can influence AUD traders' sentiment.

Role of the Reserve Bank of Australia

The primary tool of the Reserve Bank of Australia’s monetary policy to influence the Aussie dollar is the official cash rate. Cash rate decisions are typically announced on the first Tuesday of each month. A rate hike makes borrowing more expensive, thus encouraging saving in AUD, which strengthens the domestic currency. Conversely, a rate cut may lead to AUD depreciation.

How Commodity Prices Affect the Value of the Australian Dollar

Australia is a large commodity exporter, particularly in iron ore, coal, natural gas, gold, wheat, and grains. That makes the Aussie dollar exchange rate highly sensitive to changes in global commodity prices. High commodity exports due to increased global demand or supply disruptions result in a strengthening of the AUD. Conversely, if commodity prices decline, it typically results in a weaker AUD, as decreased exports prompt investors to shift their assets to other currencies.

The chart below illustrates the predominantly high positive correlation between the Australian dollar and gold.

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Popular AUD Currency Pairs

Traders interested in the Australian currency market need to distinguish between different pairs involving AUD.

Major Currency Pairs

• AUD/USD (Australian Dollar/US Dollar)
  

Minor Currency Pairs

• AUD/EUR (Australian Dollar/Euro)
• AUD/JPY (Australian Dollar/Japanese Yen)
• AUD/CAD (Australian Dollar/Canadian Dollar)
• AUD/NZD (Australian Dollar/New Zealand Dollar)
• AUD/SGD (Australian Dollar/Singapore Dollar)
• AUD/HKD (Australian Dollar/Hong Kong Dollar)
• AUD/NOK (Australian Dollar/Norwegian Krone)
  

The major pairs are characterised by higher trading volumes and liquidity. The minor pairs, while still tradable, may have lower liquidity and are typically chosen by traders looking for diversification or specific regional exposure.

Trading Hours for Australian Dollar Pairs

Timing is essential for traders looking for the best exchange rate for Australian dollars. The Australian market overlaps with other major markets like the Asian and North American. Yet, the AUD tends to be most active during the Asian trading session, which begins at 21:00 UTC and continues through to 08:00 UTC. This session encompasses the major financial centres such as Tokyo, Singapore, Sydney, and Hong Kong.

Trading Strategies for the Australian Dollar

Trading options involving the Aussie dollar can be based on interest rate differentials and correlations with other currencies.

Carry Trade

One of the more popular strategies involving the Australian dollar is the carry trade, which seeks to exploit interest rate differentials. A currency carry trade is a tactic in which a trader borrows money in a currency with a low interest rate and invests it in a currency with a higher interest rate.

Correlations with Other Currencies

One notable correlation is the positive association with commodity-linked currencies such as the Canadian dollar (CAD) and the New Zealand dollar (NZD). Traders can exploit this by considering simultaneous positions that capitalise on the collective strength of these currencies when commodity prices are on the rise.

Other currencies with positive Aussie dollar correlations are:

• South African rand (ZAR)
• Brazilian real (BRL)
• Norwegian krone (NOK)
  

Conversely, the Australian dollar often shows an inverse correlation with so-called safe-haven currencies like the Japanese yen (JPY), the US dollar (USD), and the Swiss franc (CHF). To exploit this, traders may consider hedging their positions and diversifying their portfolios with such currencies during periods of market uncertainty.

Conclusion

While trading AUD can be rewarding, it also carries a set of risks, which can be mitigated through key factor knowledge and proper risk management. By mastering these aspects, forex traders can navigate the world of Aussie dollar trading with confidence and skill. Already have a trading strategy based on the Australian dollar forecast today? You can open an FXOpen account and continue your journey right now.

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