Trading Strategies for Australian Traders

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Eager to learn the Aussie method of trading? In this article, we break down three broad trading strategies unique to the Australian market. We’ll offer an overview of each strategy, discuss the assets affected, how/why it works, and what traders need to know before getting started.

If you’d like to see how these strategies work for yourself, head over to FXOpen’s free TickTrader platform. There, you’ll find charts for many of the assets discussed here.

Commodity Correlations

Commodity correlations refer to the relationship between specific commodities and other financial assets, particularly the Australian dollar (AUD). Given Australia's reputation as a massive exporter of commodities like iron ore, coal, and gold, its economy is intricately tied to the global demand for these products. A surge in commodity prices typically results in an appreciating AUD, while a dip may lead to a weakening AUD.

Assets Traded under this Strategy

  • Primary Commodities: Australia's key exports are iron ore, coal, and gold. Fluctuations in the prices of these commodities often directly influence the AUD's movement.
  • Mining Stocks: Companies like BHP, Rio Tinto, and Fortescue Metals Group, which are giants in the mining industry, can see their stock prices impacted by global commodity trends. For instance, a spike in iron ore prices might boost the share prices of these mining firms.
  • Currency Pairs: In the forex market, pairs such as AUD/USD, AUD/CAD, and AUD/NZD become particularly relevant under this strategy, as they showcase the AUD's strength against other major currencies.

How and Why the Strategy Works

The AUD often finds itself labelled as a 'commodity currency'. This means that it's influenced heavily by the global demand for commodities. For example, if China, a major trading partner, increases its demand for Australian iron ore, this could potentially lead to a surge in both the commodity's price and the AUD.

Such correlations are great for swing trading in Australia, as they offer traders the opportunity to anticipate and capitalise on short to medium-term price movements driven by global shifts in commodity demand and supply dynamics.

Specific Points to Consider

  • Global Demand: It's imperative to monitor the demand patterns from significant trading partners, especially China, which has a considerable appetite for Australian commodities.
  • Economic Indicators: Keeping an eye on relevant economic indicators, such as trade balance reports and the Reserve Bank of Australia's statements, can provide insights into potential AUD movements.
  • External Shocks: Not all patterns remain consistent. Unforeseen global events can disrupt typical correlation setups, so traders should always be vigilant and flexible in their strategies.

Interest Rate Differentials

Interest rate differentials refer to the gap between interest rates set by central banks of different countries. This gap often plays a significant role in influencing the movement of capital across borders. Typically, countries with relatively higher interest rates attract more foreign capital because they offer better returns on investments denominated in their currency. This increased demand can lead to an appreciation of the nation's currency against others.

Assets Traded under this Strategy

  • Currency Pairs: The AUD, being influenced by the interest rates set by the Reserve Bank of Australia (RBA), often sees movement against other major currencies when there's a notable rate differential. Currency pairs such as AUD/USD, EUR/AUD, and AUD/JPY can be affected by these differentials.

How and Why the Strategy Works

A currency's appeal is often tied to the returns it can offer investors. When the RBA sets a higher interest rate compared to other central banks, increased demand can push up the AUD's value. Conversely, if other countries offer higher rates than Australia, the AUD may face downward pressure as investors seek better returns elsewhere.

For instance, if the RBA hikes its interest rates while the U.S. Federal Reserve keeps its rates static, the interest rate differential might favour the AUD over the USD, leading to a potential appreciation of the AUD/USD pair.

Specific Points to Consider

  • RBA Announcements: The RBA's monetary policy decisions and announcements are paramount. Traders closely watch these to anticipate potential shifts in the AUD's value.
  • Comparative Analysis: Regularly juxtapose Australia's interest rates with those of its major trading partners. This can give insights into potential capital flow directions.
  • Broaden the View: While rate differentials are vital, they should be one of many tools in a trader's toolkit. Incorporating them with other technical and fundamental indicators can paint a clearer picture of potential market movements.

Asian Market Correlations

Asian market correlation refers to the interconnection between Australia's economy and other significant Asian markets. Considering Australia's geographical proximity and extensive trade relationships with Asian countries, its financial markets are influenced by events in the region.

Assets Traded under this Strategy

  • Indexes: Major Australian markets like the ASX200 and S&P/ASX 50 are often influenced by Asian market movements, reflecting the broad impact on Australian equities.
  • Materials and Mining Stocks: Companies operating in the materials and mining sectors such as BHP, Rio Tinto, and South32 are particularly affected due to their reliance on export markets in Asia. If Asian economies perform well, these stocks may see positive momentum.
  • Currency Pairs: The AUD's pairs with Asian currencies like AUD/JPY, AUD/CNY, and AUD/KRW provide opportunities to trade based on regional economic trends.

How and Why the Strategy Works

Australia's trading relationships with major Asian economies like China, Japan, and South Korea make it highly sensitive to economic developments in the region. For example, strong industrial growth in China may boost demand for Australian iron ore and other materials, influencing both the mining sector's stocks and the AUD.

Conversely, an economic slowdown in key Asian markets can affect Australian exports and create downward pressure on related stocks and the AUD.

Specific Points to Consider

  • Economic Calendars: Regular monitoring of economic calendars for significant announcements and data releases in major Asian economies can provide valuable insights.
  • Trade Balance Reports: Understanding the health of trade relationships through trade balance reports allows traders to gauge potential impacts on materials and mining stocks, as well as the AUD.
  • Geopolitical Awareness: Regional geopolitical events can cause market volatility. Staying informed about developments in the Asian political landscape helps traders anticipate sudden market shifts.

The Bottom Line

Understanding the intricate correlations within the Australian market is essential for traders with any level of experience. The strategies detailed in this article, focusing on commodities, interest rate differentials, and Asian market correlations, provide a framework for navigating the complex interplay of factors affecting the AUD and related assets. If you're keen to dive into the Aussie method of trading, you can open an FXOpen account and start applying these strategies in minutes.