What to Consider When Trading the Australian Dollar

 

Hello there, this is tradingpedia.com and this video deals with what to consider when trading the Australian dollar. The Australian dollar is a very popular currency on the FX dashboard, because it has lower spreads (the AUDUSD pair has one of the lowest spreads).

Australian Economics

Consider that if this is the world, and this is the Australian dollar, the first thing to consider is that the Australian dollar pairs, especially the AUDUSD (called Aussie) has one of the lowest spreads on the currency market, after the EURUSD.

Up until a few years ago, being on the long side on the AUDUSD pair paid a positive swap in the sense that if you kept positions opened over the night, you will get interest on the trading account – the so-called carry trade – not the case anymore, but it used to be a theme.

Besides the lower spreads in Australia, consider commodities. Think of gold and raw materials – everything that comes to mind when thinking of commodities. Australia is a big commodity producer as it has tons of resources, and the price of commodities influences the Australian economic performance. The commodity sector, the mining sector, employs many people – many families have members working in the industry and therefore changes in the industry affects the Australian GDP and the value of the Australian dollar.

When commodities prices are rising, as it is the case during the 2020 pandemic, the AUDUSD tends to move higher, as you can see. But the Australian dollar’s strength was also fueled by commodity prices the jumped higher. Gold made a new all-time high above the $2,000 level and therefore, when commodity prices are rising, they will support a higher AUDUSD and the central bank will ignore the strength in the currency because the higher commodity prices will offset the negative impact that a stronger currency will have on inflation.

So when you trade the Australian Dollar, think of the price of gold. Therefore, if you look at the price of gold on the AUDUSD lower timeframes you will see that they have a tight correlation.

What About China

Also, think of China. What does China have to do with the Australia? Well, they have many things in common. China imports its raw materials from its proximity – Australia.

Therefore, when Chinese data points to economic recovery or strength, the Australian dollar will be supported on dips because it means that the Chinese will buy more raw materials from Australia. This is one of the reasons why the Australian dollar is one of the strongest performers during this crisis. Because China is one of the few countries to have economic growth in 2020, as it contained the virus, it will buy resources from Australia, meaning that the Australian dollar is supported on dips. As such, think of the Chinese economic performance when trading the Australian dollar.

Reserve Bank of Australia

The Reserve Bank of Australia (RBA) is another thing to consider. This is a central bank that did not face a recession for decades. As such, many voices doubt the ability of the RBA to fight a recession because none of its members saw one. So how to fight a recession when you did not see one in your life?

Due to the global economics and central banks’ sharing their policies, it is likely that the RBA will do a great job in fulfilling its mandate of price stability and in supporting the economic activity in Australia.

The RBA releases its monetary policy monthly – every first Tuesday of the month, except for the month of January. This week, as this is the NFP week, the RBA delivers its decision on Tuesday and the Australian dollar moves only if the RBA decisions are not priced in.

In the last years, due to the U.S. housing crisis, the European sovereign crisis and so on, the AUDUSD declined based on the fact that the RBA lowered the interest rates while the Fed hiked recently all the way into March 2020.

Last but not least, think of the AUD being part of one of the most powerful pairs that has the biggest ATR range on the FX dashboard. This is viewed as a risk-on/risk-off pair. Namely, when everything goes bad in the world, the EURAUD rises. The more it rises, the worse it is.

If you go on the EURAUD cross and your check what happened during the March 2020 meltdown when the US equity markets dropped, you will see that the EURAUD cross moved to the upside. And then, by the time the markets calmed down, the EURAUD came down nicely, from 1.90 to 1.60.

Sum Up

These are the things to consider when trading the Australian dollar, as it is part of some interesting pairs. For example, the AUDJPY that trades correlated to the U.S. stock market, or the AUDCAD a pair that reflects two commodities, gold, and oil, so there is a strong relationship between the two.

Thank you for being here. Bye, bye.