Trading the AUD/USD Currency Pair

What is AUD/USD Trading?

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 for International Settlements. 

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 an excellent gauge of overall market sentiment. 

Key Points

• The AUD/USD currency pair is influenced by global commodity prices, China’s economy, and central bank policies, reflecting Australia’s significant export-driven economic activity.
• Historical fluctuations in the AUD/USD exchange rate, such as its rise during China’s industrial expansion, illustrate its responsiveness to global economic shifts and commodity market trends.
• Traders are attracted to the AUD/USD pair for its high liquidity, clear technical patterns, and the potential for profit from volatility and economic indicators, with optimal trading times during overlapping market sessions.

AUD/USD History

Introduction of the Australian Dollar in 1966

The AUD/USD pair, one of the most traded globally, has a rich history dating back to the introduction of the Australian Dollar (AUD) in 1966.

The AUD was originally pegged to the British pound until 1967, when the Pound was devalued against the US Dollar.

However, the Australian Dollar maintained its peg to the US Dollar until 1971.

Introduction of Commodity Currency

As a commodity currency, the AUD’s value is significantly influenced by Australia’s exports of resources such as coal, gold, natural gas, and iron ore. Its performance is tied to global commodity prices, making it sensitive to global economic conditions and market sentiment.

For instance:  

In the early 2010s, driven by China’s industrial boom, iron ore prices surged, reaching a peak of $180 per tonne ^[1]. As a reflection of this trend, the Australian Dollar (AUD) soared, at one point trading at 1.10 against the US Dollar (USD) in 2011, its highest level since the currency was floated in 1983 ^[2]. 

Major Historical Events — Float of AUD 1983

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 the Australian dollar’s value would be set in the foreign exchange market rather than maintained at a government-set target price. 

Since becoming a free-floating exchange rate, AUD/USD has fallen to a record low of 0.4775 in early 2001, then recovered over the next decade to reach a 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 copper price data overlaid. 

Relationships with USD

The AUD/USD exchange rate is influenced by factors such as interest rate differentials, economic indicators, and global risk sentiment. For example, when the Bank of Australia raises interest rates, it attracts foreign capital, leading to an appreciation of the AUD against the USD. Conversely, during periods of market uncertainty, traders may seek the safety of the USD, which can lead to a stronger USD and a weaker AUD.

Why Trade AUD/USD Currency Pair?

The AUD/USD currency pair is popular among traders due to its high liquidity and clear technical patterns.

As one of the major pairs in the forex market, it offers low spreads, reducing trading costs. As a commodity currency, the AUD is strongly correlated with commodity prices, particularly gold and iron ore. This relationship creates unique trading opportunities driven by commodity price movements. 

Furthermore, economic indicators and interest rate differentials between Australia and the U.S. often have predictable effects on this currency pair. This makes it easier for traders to develop strategies. The AUD/USD pair is known for its volatility, which, while posing risks, can also offer high returns for traders.

Historical Trends of AUD/USD Market ^[3]

• 2008

In 2008, the global financial crisis significantly affected the AUD/USD exchange rate. The Australian Dollar (AUD) started the year at 0.88 USD and fell to 0.71 USD by year-end. This represented a 19.23% decrease, reflecting economic uncertainty and risk aversion during this period.

• 2010 

In contrast to 2008, 2010 was a year of AUD recovery. It started the year at 0.91 USD and ended at 1.02 USD, up 14.00%. This was due to the rebound in commodity prices and Australia’s strong economic performance, which boosted investor confidence in the AUD.

• 2022

In 2022, the AUD declined against the USD. The AUD started the year at 0.73 USD and ended at 0.68 USD, a 6.38% decline. This was due to a combination of factors, including the impact of the COVID-19 pandemic and changes in monetary policy.

AUD/USD Prediction

Looking ahead, there are varying predictions for the AUD/USD exchange rate.

For instance, ANZ forecasts that the AUD will be worth 0.72 US cents by the end of 2025, while Westpac predicts 0.71, and NAB continues to aim high with a prediction of 0.75 US cents to 1 Australian dollar ^[4]. 

These predictions are based on factors such as economic growth, interest rates, and geopolitical events. However, it’s important to note that currency predictions are inherently uncertain and actual rates may vary.

What Moves the AUD/USD Exchange Rate?

Central Banks Decision

Central banks, specifically the Reserve Bank of Australia (RBA) and the US Federal Reserve (Fed), play a pivotal role in influencing the AUD/USD exchange rate. The decisions made by these institutions regarding monetary policy, such as interest rate changes and quantitative easing, directly affect the value of the AUD and USD. Traders closely monitor central bank statements and meetings for clues about future policy direction.

Economic Indicators

Key economic indicators such as GDP growth, employment, inflation, and manufacturing data provide crucial insights into the health and performance of the Australian and US economies. 

Positive economic data in Australia typically strengthens the AUD, while strong data in the US bolsters the USD, affecting the AUD/USD exchange rate. 

Visit the Vantage market news and analysis page to get all the latest market analysis, news and events.

Chinese Economy

China is Australia’s largest trading partner, and the health of the Chinese economy significantly affects the AUD/USD exchange rate. Changes in Chinese economic data, trade relations, and policies can influence Australian exports, and consequently, the AUD’s value. Financial events in China, such as shifts in growth rates or trade disputes, can create volatility in the AUD/USD exchange rate.

Interest Rate Differences

Interest rate differentials between Australia and the United States are a critical factor in AUD/USD movements. When the RBA raises interest rates or signals a more hawkish stance, it can attract foreign investment into Australian assets, leading to an appreciation of the AUD. Conversely, when the Fed raises rates or adopts a more hawkish policy, it can strengthen the USD and weaken the AUD.

Commodity Prices 

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

AUD/USD Correlations

Positive Correlations ^[5,6]

Gold

The AUD/USD pair has a strong positive correlation with gold prices. This is because Australia is one of the world’s largest gold producers, and changes in gold prices can significantly impact the Australian economy and, consequently, the value of the AUD.

NZD/USD

The AUD/USD pair is highly correlated with the NZD/USD pair. This is because both Australia and New Zealand have similar economic structures and are heavily reliant on commodity exports.

EUR/USD

The AUD/USD pair also shows a positive correlation with the EUR/USD pair. This is because both pairs are quoted in US dollars, and significant changes in the USD’s value can affect both pairs in the same way.

Negative Correlations ^[6,7]

USD/CAD

The AUD/USD pair is negatively correlated with the USD/CAD pair. This is because the CAD is also a commodity currency, and changes in commodity prices can have opposite effects on the AUD and CAD.

USD/JPY

The AUD/USD pair is negatively correlated with the USD/JPY pair. This is because the JPY is often considered a safe-haven currency and tends to strengthen during times of market uncertainty, which can lead to a weaker AUD.

USD/CHF

The AUD/USD pair also shows a negative correlation with the USD/CHF pair. This is because the CHF, like the JPY, is considered a safe-haven currency, and its value often appreciates during periods of market volatility, which can weaken the AUD.

How to Trade AUD/USD

In this section, we will delve into ways you can trade the AUD/USD currency pair, providing you with a comprehensive guide to navigate this popular forex market.

Trade AUD/USD Using Fundamental Analysis 

A range of underlying fundamental variables influences 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 affect the trajectory of AUD/USD through their influence on interest rates. 

As shown in the chart below, the local exchange rate is strongly positively correlated 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. At the same time, the Federal Reserve keeps its 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: a hawkish shift in Fed policy is likely to narrow this spread and undermine AUD/USD. 

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

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 from China support the exchange rate, as they suggest strong demand for Australian exports. On the other hand, weak growth figures can significantly undermine AUD/USD, as market participants price less Chinese demand for Australian goods. Key economic data points to keep an eye on are GDP, CPI, PPI, industrial output and major PMI releases. 

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. 

The forex market reacts swiftly and often with high volatility to unexpected news or data releases. Being well-informed in real-time allows traders to assess risks, seize opportunities, and adjust strategies promptly. This ensures timely and well-informed decisions to navigate the ever-changing forex landscape successfully.

Stay up to date and gain access to real-time data by regularly checking Vantage’s economic calendar and sentiment indicators.

Trade AUD/USD Using Technical Analysis 

Due to its popularity and high trading volume, AUD/USD tends to adhere to primary psychological chart levels and is a prime candidate for breakout traders, given its aggressive moves out of consolidation patterns. 

Price action trading

Support and resistance: In AUD/USD, horizontal support and resistance levels are pivotal for executing long or short trades, with rates often retesting former levels after breakouts before establishing a new trend. 

As shown in the chart below, key trend breaks often lead to a short-term pullback before prices resume accelerating in the direction of the original breakout. 

Fibonacci: Fibonacci retracements are a quick and easy way of predicting support and resistance levels in Forex. They are based on the Fibonacci sequence, a mathematical sequence in which each number is the sum of the two preceding numbers.  

The most commonly used Fibonacci retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels represent potential points at which a currency pair may reverse its current trend. The Fibonacci tool works on the principle that markets tend to ‘retrace’ a portion of a move before continuing the dominant trend.

Indicator Trading

Indicator trading uses mathematical calculations and graphical representations to analyse historical price data. These indicators are designed to provide insights into market trends, momentum, volatility, and potential reversal points. Traders use them to identify buy and sell signals, confirm trends, and manage risk. Let’s look at two examples: Moving Averages and RSI.

Moving Averages: Moving averages are one of the simplest and most widely used forex indicators. They smooth out price data by calculating the average price over a specified period, helping traders identify trends and potential trend reversals.

Relative Strength Index (RSI): RSI measures the speed and change of price movements. It ranges from 0 to 100 and is often used to identify overbought and oversold conditions. Traders look for RSI divergences and crossovers to make trading decisions.

Please read our guide to technical indicators to help you understand the different types.

Risk Management

Risk management is crucial in AUD/USD trading due to forex market volatility. Key strategies include setting stop-loss and take-profit levels, diversifying the portfolio, and staying up to date on economic news. These measures can help generate returns while minimising losses.

AUD/USD Trading Strategies

Before we discuss individual strategies, let’s define what it means to go long and short on AUD/USD.

What it means to short AUD/USD

Shorting the AUD/USD pair means that a trader believes the Australian dollar will depreciate against the US dollar. 

In this scenario, the trader would sell AUD, expecting its value to decline. If the AUD declines in value relative to the USD, the trader can buy it back at a lower price, realising a profit on the difference.

What it means to long AUD/USD

Going long on the AUD/USD pair means that a trader believes the Australian dollar will appreciate against the US dollar. 

In this case, the trader would buy AUD, expecting its value to increase. If the AUD appreciates against the USD, the trader can sell the AUD at a higher price, thereby realising a profit on the difference.

Here are some popular forex trading strategies you can use when trading AUD/USD.

Day Trading

Day trading involves speculating on securities by buying and selling them within the same trading day. Traders capitalise on short-term price fluctuations in various financial instruments such as stocks, options, and futures. 

Day traders typically close all positions before the market closes to mitigate risk and prevent losses from price gaps between the opening and closing prices of consecutive trading days.

Learn all about the difference between day trading and long-term trading with our comprehensive article.

Position Trading

Position trading is a long-term investment strategy that involves taking positions in financial markets with the intention of holding them for an extended period, often months or even years.

Traders who use a position-trading strategy base their decisions on fundamental analysis, which considers factors such as macroeconomic trends, company financials, and geopolitical conditions to identify assets with long-term growth potential. They aim to benefit from major trends and market cycles, seeking substantial price movements over time.

Swing Trading

This type of trading focuses on capturing shorter- to medium-term price swings in the financial markets. Swing traders typically hold their positions for a few days to a few weeks, aiming to profit from price movements during this period. They use tools such as chart patterns and indicators to identify potential entry and exit points. 

Swing trading strikes a balance between the quick pace of day trading and the long-term perspective of buy-and-hold investing, making it suitable for traders with other commitments who want to benefit from market volatility.

Please read our article covering position trading vs swing trading to help you determine which can be more useful for your trading scenario.

Sentiment Trading

Sentiment trading, also known as sentiment analysis, involves assessing investor attitudes towards a market or asset. This method goes beyond traditional data points, incorporating emotions such as fear and greed to accurately gauge sentiment. 

Traders use tools such as the VIX and the Fear and Greed Index to gauge market sentiment and make informed decisions. However, because human emotions are unpredictable, sentiment analysis is most effective when used alongside other strategies to optimise trading outcomes.

News Trading

News trading leverages short-term price movements in financial markets following significant economic or geopolitical news releases. Traders monitor economic calendars for scheduled data releases (such as employment reports or interest rate decisions) and for unexpected news (such as geopolitical events or corporate earnings reports). 

The goal is to quickly assess how these events affect asset prices and execute trades to profit from resulting market fluctuations.

Best Time to Trade AUD/USD ^[8]

The forex market operates 24 hours a day, five days a week, across various trading sessions globally. For the AUD/USD pair, certain times are more volatile and hence potentially more profitable for traders. Understanding these market dynamics can help traders make informed decisions when navigating the forex market.

Overlapping Sessions

The most volatile periods for AUD/USD trading are during the overlapping sessions when both the Australian and US markets are open. 

These periods typically exhibit the highest liquidity and volatility, offering the best trading opportunities.

• Sydney and Tokyo (AEST 9:00 am – 12:00 pm): This period sees moderate volatility, suitable for traders who prefer a lower risk trading environment
• London and New York (EST 8:00 am – 12:00 pm): This period is highly volatile, ideal for traders seeking significant price movements and short-term gains.

Asian Session Volatility

During the Asian trading session (AEST 7:00 am – 3:00 pm), the AUD/USD pair experiences moderate volatility.

This period is ideal for traders who prefer a less risky environment.

European and US Session Volatility

The AUD/USD pair’s volatility increases during the European and US sessions (EST 2:00 am – 4:00 pm), providing more trading opportunities but also higher risks.

Trading AUD/USD Currency Pair with Tight Spreads at Vantage

Open a position on major and minor currency pairs with competitive spreads on Vantage. Start trading AUD/USD with CFDs today!

You can open your live trading account in minutes at Vantage to start trading AUD/USD with CFDs. If you’re not ready to go live, open a free demo account to practice various trading strategies and techniques without having to deploy your own capital. 

Get started with Vantage today!

FAQs for AUD/USD Trading

What is the Spread on AUD/USD at Vantage?

At Vantage, the spread on AUD/USD is competitively low. Traders can enjoy spreads starting from under 1 pip during high-liquidity periods. For RAW accounts, spreads start at 0.0 pips; for Standard accounts, they start at 1.0 pips. 

What are the risks of trading AUD/USD?

Trading AUD/USD comes with several risks:

• Economic Factors: Unexpected economic developments, such as changes in interest rates, political instability, or natural disasters, can lead to significant price fluctuations.
• Commodity Dependency: Australia is a major exporter of commodities, such as iron ore, coal, and gold. Sudden fluctuations in commodity prices can impact the value of the Australian dollar.
• Currency Correlations: The AUD/USD pair is often influenced by the movements of other currency pairs, particularly those involving the US dollar.

Is AUD/USD a Good Pair to Trade?

AUD/USD can be a good pair to trade. It is one of the most traded currencies in the world, offering high liquidity, relatively attractive spreads, and a link to global economic trends. It often responds swiftly to financial data and central bank policy, creating numerous trading opportunities.

When to Trade AUD/USD?

The best time to trade AUD/USD is possibly during the overlapping sessions when both the Australian and US markets are open. This period typically sees the highest liquidity and volatility, offering the best trading opportunities. 

The most volatile periods are:

• Sydney and Tokyo (AEST 9:00 am – 12:00 pm): Moderate volatility, suitable for traders who prefer a lower risk trading environment.
• London and New York (EST 8:00 am – 12:00 pm): High volatility, ideal for traders seeking significant price movements and short-term gains.

References