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How to Trade AUD/USD?

How to Trade the AUD/USD Exchange Rate

Introduction to Trading AUD/USD

The Australian Dollar is the fifth-most traded currency in the foreign exchange market and accounts for just under 7% of global FX turnover, according to the Bank of International Settlements. Given Australia’s role as a major exporter of coal, gold, natural gas and iron ore, AUD is commonly referred to as a commodity-sensitive currency due to its strong positive correlation with the aforementioned products. 

Indeed, over 8% of Australia’s GDP is represented by the mining sector, while agricultural exports make up an additional 2%. With the majority of these exports being purchased by China, the performance of the world’s second largest economy, and Australia’s largest trade partner, is also a key driver of the local currency and AUD/USD exchange rate in particular.

The “Aussie”, the colloquial name for the AUD/USD exchange rate, also exhibits a strong relationship with global equity markets and tends to perform better in an environment in which stock prices are rising. This sensitivity to benchmark stock market indices makes AUD/USD a great gauge of overall market sentiment.

History of AUD/USD

The Australian Dollar’s relationship with its US counterpart came into its own when the Australian Government floated the local currency in 1983. This meant that the value of the Australian Dollar would be set in the foreign exchange marketplace instead of maintained at a particular target price by the government.

Since becoming a free-floating exchange rate, AUD/USD has fallen to a record low of 0.4775 in early 2001 before recovering over the next decade to set its record high of 1.1080 in 2011. Interestingly, this stratospheric run higher by the Aussie shows a strong positive correlation with the decade long bull-run seen in commodity markets.

Pictured below is AUD/USD’s meteoric climb between 2001 and 2011, with the price of copper overlayed.

AUD/USD and Copper Bull Market (2001-2011)

AUD/USD and Copper Bull Market (2001-2011)

Chart prepared by Daniel Moss, created with Tradingview

How to Trade AUD/USD Using Fundamental Analysis

A range of underlying fundamental variables influence the risk-sensitive AUD/USD exchange rate’s daily gyrations and ought to be constantly monitored when trading this forex pair.

Central Bank Policy and Interest Rate Differentials

The respective monetary policy settings of the US Federal Reserve and the Reserve Bank of Australia (RBA) can impact the trajectory of AUD/USD, through the influence each central bank has on interest rates.

As shown in the chart below, the local exchange rate exhibits a strong positive correlation with the interest rate differential between Australian 10-year Government Bonds and US 10-year Treasuries. This spread would widen when the RBA raises interest rates while the Federal Reserve keeps their respective policy settings stable, ultimately resulting in a positive inflow of capital to Australia and in turn strengthening the AUD/USD rate. The reverse is also true, with a hawkish shift in Fed policy likely narrowing this spread and undermining AUD/USD.

US 10-Year Treasury, Australian 10-Year Government Bond Spread Differential vs AUD/USD Exchange Rate

US 10-Year Treasury, Australian 10-Year Government Bond Spread Differential vs AUD/USD Exchange Rate

Chart prepared by Daniel Moss, created with Tradingview

Commodity Prices

Given the Australian economy is a large exporter of several key commodities, such as copper, natural gas and iron ore, it is hardly surprising that the local currency’s trajectory is heavily influenced by the price trends of commodities. This relationship is highlighted below, with a strong positive correlation seen between AUD/USD and the Goldman Sach’s commodity index. It is important to understand the overarching sentiment driving commodity markets, to identify the potential long-term trajectory of the Aussie.

Goldman Sach’s Commodity Index vs AUD/USD Exchange Rate

Goldman Sach's Commodity Index AUD/USD Exchange Rate

Chart prepared by Daniel Moss, created with Tradingview

Local and Chinese Economic Data

With China accounting for over 42% of Australian exports, the overall performance of the world’s second largest economy has a profound effect on AUD/USD. Generally, strong economic data out of China is supportive for the exchange rate, as it suggests strong demand for Australian exports. On the other hand, weak growth figures can significantly undermine AUD/USD, as market participants price in less Chinese demand for Australian goods. Key economic data prints to keep an eye on are GDP, CPI, PPI, industrial output and major PMI releases.

Australia Exports by Country

australia Exports by Country

Source – TradingEconomics

US Equity Markets

As noted by the Reserve Bank of Australia, “the value of the Australian dollar tracks movements in other financial markets and changes in risk-sentiment (how much risk investors are willing to take on in their investments).

For example, if market participants are bullish on the outlook for economic growth they will be more prepared to take on more risk, which often coincides with an increased demand for Australian Dollars. Therefore, you tend to see the Australian dollar appreciate when global equity markets move higher, and depreciate when equity markets fall.

How to Trade AUD/USD Using Technical Analysis

Due to its popularity and high volume of market participation, AUD/USD tends to adhere to major psychological chart barriers and is also a prime candidate for breakout traders due to its aggressive moves out of consolidation patterns.

Horizontal support and resistance levels are pivotal when looking to execute a long or short trade on AUD/USD, with rates showing a tendency to retest former levels upon breakouts before establishing a new trend.

As seen in the chart below, key trend breaks often result in a short-term pullback before prices continue to accelerate aggressively in the direction of the original breakout.

Trade AUD/USDUsing Technical Analysis

Chart prepared by Daniel Moss, created with Tradingview

Trade AUD/USD at Vantage

You can open your live trading account in minutes at Vantage to start trading AUD/USD. Vantage also provides a free demo account, which will allow you to practice various trading strategies and techniques without having to deploy your own capital. Follow the links above to find out how you can get started.


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