intro – aud usd:
AUD USD, also referred to as the ‘Aussie’, represents the AUD against the USD. On average, it makes up 5% of daily forex trading by transaction volume. The value of the Australian dollar is tied closely to the value of its exports. Metal and mineral exports such as iron ore and coal account for a large proportion of the country’s GDP(gross domestic product).
A drop in value of these commodities on global market would likely cause a slump in value of AUD. In the case of the AUD USD currency pair, this means USD would become stronger. So it would cost fewer USD to buy one AUD. We will take a look at how AUD USD came into existence. We will then look at the most important variables and factors that influence Australian dollar – US dollar rate.
a detour back in time
Before the adoption of the current Australian dollar in 1966, Australia’s currency was the Australian pound. And, like the British pound sterling, it was divided into 20 shillings. Then, each shilling was divided into 12 pence. Thus, making a pound worth 240 pence. The Australian pound was at parity with the pound sterling when introduced in 1910. Its value diverged from the pound sterling in 1931 after currency devaluation.
In 1966, when the Australian dollar was introduced, the international currency relationships were maintained under the Bretton Woods system. It was a fixed exchange rate system quoting Australian dollar(AUD) using a U.S. dollar(USD) standard. The Australian dollar, however, was effectively pegged to the British pound at an equivalent value of approximately 1 gram of gold.
On 12 December 1983, the AUD was floated. Thereby, allowing its value to fluctuate with supply and demand on international money markets. On 15 October 2010, the AUD reached parity with the USD for the first time since becoming a freely traded currency. The AUD USD then traded above parity for a sustained period in November, 2010. And then, fluctuated around that mark into 2011. On 27 July 2011, the AUD hit a record high since it’s free float and traded at 1.1080 at one point.
AUD USD market today
Commodity prices are the main driver of Australian Dollar – US Dollar rate. Hence, while all the usual factors that impact forex markets are relevant for AUD USD, there is some peculiarity. Contrary to most developed western countries, Australia’s balance of trade depends on commodity exports such as minerals and agricultural products. This means the AUD USD varies significantly during the business cycle.
Australian Dollar rises during periods of higher global economic growth, due to high demand for raw materials. On the other hand, during global recessions, AUD USD falls, due to falling demand for Australia’s exports(metals and minerals as raw materials). During global recessions, Australian domestic spending overshadows the export earnings. This movement is in the opposite direction to other reserve currencies, which tend to be stronger during recessions as traders move value from falling stocks into cash and sovereign bonds.
variables and factors that impact AUD USD market
Firstly, the trade volume between Australia and rest of the world dictates the demand for Australian dollars. In addition USD is the main base currency for global commodity trade. Therefore Australia’s balance of trade has a major impact on AUD USD rate. High demand for raw materials such as metals and minerals extracted in Australia will result in AUD USD rate to rise. This is because mining companies operating in Australia will be paying workers in AUD. Hence increasing the demand for AUD. At the same time, final goods will be sold globally, US being the largest of developed countries. This will cause US stock prices to move up. Thereby, causing US dollars to depreciate and AUD USD rate to rise.
Secondly, domestic inflation in Australia and US also impacts the Australian dollar rate. Higher inflation depreciates the value of the currency. For instance a higher inflation rate in Australia, means that generally a unit raw material ‘X’ that was AUD 10, now costs lets say, AUD 11. As a result, Australian raw materials would now become more expensive for American manufacturers.
This will cause a rise in cost of production for American goods leading to lower demand. As a result, Australian miners, will want to keep the prices consistent in USD. Hence, the markets will see a depreciation in the value of AUD vs USD. So, the Australian miner will get more AUD per USD. However, their AUD will be worth less now due to higher domestic inflation. This is assuming 0 inflation rate change in US and no change to any of the other factors.
Thirdly, short and medium term interest rates will impact the AUD USD market as higher rates in any currency will increase the demand for that currency. As a result, the domestic currency’s value will appreciate. For instance, if the rates in US go up, the Australian miners who got paid in USD might park the USD cash reserve in an interest paying account or buy US Govt. bonds, instead of exchanging it into AUD.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact the value of AUD USD. Unemployment rate(and per Capita GDP) is a measure of how much disposable income the consumers have, that they can spend on foreign goods. For instance, lower unemployment and higher per Capita GDP in US will increase demand for cars. This will create higher demand for metals from Australia, and so, a higher demand for AUD. This is because the miners have to be paid in AUD. Meanwhile, a higher PMI in US will mean an increase in economic activity in US. This means higher employment in US and a high demand for USD to pay those employees.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily fx prediction using algorithms based on all factors that impact the price of a currency pair. Then, it evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any questions, please contact our support team.
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