The Australian dollar versus US dollar (AUD/USD) is one of the most popular currency pairs traded in the forex market. The pairing provides traders with several unique opportunities thanks to the close economic ties but differing monetary policies between Australia and the United States.
Introduction to AUD/USD
The AUD/USD is traded on the foreign exchange (forex) market, which is the largest, most liquid market in the world. On the forex, currencies are traded in pairs and exchange rates fluctuate based on supply and demand.
The Australian dollar (AUD) is the quote currency while the US dollar (USD) is the base currency in the AUD/USD pair. The quote currency is the numerator in a currency pair and how much of the quote currency is needed to buy one unit of the base currency indicates the exchange rate.
For example, if AUD/USD is trading at 0.7500, one Australian dollar buys 0.75 US dollars. If the rate rises to 0.7700, the Australian dollar has strengthened relative to the US dollar. Conversely, if the rate declines to 0.7300 the Aussie dollar has weakened compared to the greenback.
Traders look to profit from movements in the exchange rate by selling a currency pair when it is high and buying when it is low. The difference between the sell and buy prices represents the trader’s profit or loss.
What Impacts Movements in AUD/USD
Many macroeconomic factors can impact fluctuations in the AUD/USD exchange rate. Below are some of the most significant influences.
Interest Rate Differentials
Interest rates have a major impact on currency valuations. According to interest rate parity, currencies with higher interest rates tend to be more attractive as investments compared to currencies with lower yields.
Since early 2000s, Australia’s interest rates have generally been higher than those in the US. This has helped boost demand for the Aussie dollar and push up AUD/USD over the long run.
However, the US Federal Reserve has been raising rates since 2015 while the Reserve Bank of Australia has been cutting rates. This convergence means interest rate differentials are having less impact on AUD/USD currently compared to past years.
Economic Growth
Economic expansion encourages foreign investment in a country which leads to increased demand for that nation’s currency. Faster growth in Australia versus the US will tend to lift AUD/USD.
Over the past decade, Australia’s economy benefited from robust growth in China while the US recovery from the global financial crisis was slower. This divergent growth boosted the Aussie. Looking ahead, China’s economic slowdown poses a headwind for Australia while US growth remains relatively firm.
Commodity Prices
As a resource rich nation, Australia relies heavily on commodity exports such as iron ore, coal, gold and liquefied natural gas (LNG). When global commodity prices rise, demand for Australian exports increases which supports the local dollar.
Conversely, falling commodity prices due to reduced global demand weighs on the Aussie as export revenues decline. China’s slowing growth has weakened its demand for Australian commodities, creating a headwind for AUD/USD.
Risk Sentiment
The Australian dollar is viewed as a higher risk or growth correlated currency. When market sentiment improves and investors embrace risk, the Aussie dollar tends to rise. In times of risk aversion and uncertainty, traders tend to sell the Australian dollar and buy safe haven currencies like the US dollar and Japanese yen.
Technical Analysis
In addition to monitoring fundamentals, forex traders utilize technical analysis to identify trends and opportunities in the AUD/USD exchange rate. By analyzing past price movements and chart patterns, technical traders look to forecast potential support and resistance levels.
Common technical strategies for AUD/USD include trend following using the moving average, range trading between support and resistance, and breakouts. Traders also widely use indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) on AUD/USD charts.
Trading AUD/USD Around Key News Events
The release of important economic data and central bank policy decisions can cause volatility in the AUD/USD exchange rate. Being aware of upcoming news events and understanding how they may impact the Aussie dollar is critical for trading AUD/USD.
Below are some of the most impactful regular events on the economic calendar for the Australian dollar and US dollar.
RBA Interest Rate Decisions
The Reserve Bank of Australia meets once a month to determine whether to adjust the official cash rate. Changes in interest rates affect the attractiveness of the Aussie dollar. When the RBA leaves rates unchanged, the policy statement can also elicit volatility.
RBA Monetary Policy Meeting Minutes
Two weeks after each policy meeting, the RBA releases the meeting minutes which provide further insights into its economic outlook and potential future decisions. The minutes often cause large reactions in AUD/USD.
Australian Employment Data
Key labor market data like the unemployment rate and change in employment are published monthly. Strong jobs numbers tend to boost the Australian dollar while soft results pressure AUD/USD lower.
US Non-Farm Payrolls
The monthly non-farm payrolls report is closely watched as both a gauge of US economic health and potential signal for monetary policy adjustments by the Federal Reserve. The headline payrolls figure as well as wage growth data often spur big moves in AUD/USD.
US Federal Reserve Policy Meetings
Eight times a year, the Fed makes interest rate decisions and issues a policy statement. Rate hikes typically boost the US dollar while dovish signals weigh on the greenback. The press conference by Fed chair Jerome Powell can also elicit volatility in currency pairs like AUD/USD.
In addition to the scheduled news events, unforeseen developments in the global economy and markets can cause large swings higher or lower in the AUD/USD exchange rate. Monitoring news headlines is critical even outside regular data releases and events.
Trading Strategies for AUD/USD
AUD/USD’s liquidity and volatility presents traders with many opportunities to profit. Some strategies to consider include:
Range Trading
When AUD/USD becomes rangebound between support and resistance, traders can buy near the low end anticipating a move up towards resistance. As the exchange rate nears the upper boundary, positions are unwound or reversed. Repeat as long as range persists.
Trend Following
Using moving averages or price channels, traders identify and follow medium or longer-term trends in AUD/USD. Additional positions can be added after a breakout while stops are adjusted to lock in profits.
News Trading
Major economic data and events cause volatile short-term movements as traders react to the news. By monitoring the economic calendar, traders can position for potential market reactions around these high impact events.
Carry Trade
With interest rates in Australia above those in the US, traders can profit from the rate differential by borrowing USD and buying higher yielding AUD. Positions are held for weeks or months to earn the interest rate spread.
Hedging
Companies with Australian dollar currency exposure due to international business look to hedge AUD/USD risk using forwards or options. Traders provide liquidity and price these instruments.
Trading AUD/USD through Forex Brokers
There are several ways traders access the forex market, with the retail leveraged contracts offered by brokers the most common. When trading AUD/USD through a broker, there are a few key considerations:
Regulation & Reputation
Due to the possibility of forex scams, only open accounts with regulated brokers in reputable jurisdictions like Australia, the UK, Europe, and the US. Check registration on official government sites.
Trading Platforms
Brokers offer desktop, web, and mobile trading platforms. Look for user-friendly interfaces with charting and order entry capabilities. Advanced traders may benefit from platforms with automation and backtesting.
Leverage Options
Forex brokers offer leverage up to 30:1 in Australia, 50:1 in the US, and higher elsewhere. Leverage amplifies potential gains but also increases risks. Conservative traders utilize 5:1 leverage or less.
Execution Quality
Factors like speed of execution, slippage, and spread determine overall trading costs. Compare execution stats before selecting a broker and be wary of false advertising.
Account Funding/Withdrawals
Convenient and low cost deposit/withdrawal options include wire transfers, debit/credit cards, e-wallets, and online payment networks. Ensure funding in AUD is available to avoid conversion fees.
Developing an AUD/USD Trading Plan
Creating a strategic trading plan can help maximize success when trading the Australian dollar against the US dollar pair. Below are some tips:
Risk Management
Determine acceptable risk per trade and on the overall account based on capital and experience. Many traders risk only 1-2% of capital per position. Use stop losses on every trade.
R:R Targets
Strive for a minimum 2:1 risk/reward ratio. If risking 30 pips per trade, aim to gain at least 60 pips. Consistent positive risk-rewards lead to profitable results in the long run.
Strategy Rules
Define specific rules for entry and exit signals. Follow the plan strictly and do not let emotions or opinions interfere with trading decisions.
Journal Keeping
Maintaining a trading journal allows you to review what worked and what didn’t. Update the strategy to improve results.
Patience
Refrain from overtrading. Wait for ideal set ups matching your plan rather than randomly opening positions. Less is often more when trading currencies.
The Advantages of Trading AUD/USD
While any forex pair comes with risks, trading the Australian dollar against the US dollar offers several attractive benefits:
- AUD/USD is the fifth most traded currency pair, providing ample liquidity for fast trade execution.
- As the main Australasian currency, the Australian dollar experiences active fluctuation, creating opportunities.
- Trading hours run from 5pm ET on Sunday to 4pm ET Friday, providing opportunities during both US and Asian markets.
- Resources like historical charts, technical indicators, economic data calendar, and breaking news on AUD/USD are widely available.
- Pairs trading allows traders to hedge risks by taking concurrent long and short positions on correlated currencies like AUD/USD and NZD/USD.
- Leverage allows smaller accounts to gain exposure with less capital outlay.
In summary, AUD/USD presents an attractive opportunity for forex traders seeking volatility, liquidity, and potential profits from macroeconomic and interest rate divergences. By implementing disciplined risk management and developing a strategic approach, retail traders can capitalize on both trends and fluctuations in this intriguing currency pair.
