Markets Geek

This toggle bar can feature specific pinned articles perhaps

Things to Consider When Trading the Australian Dollar

Posted: Monday, September 21st, 2020

Estimated Reading Time: 2 minutes

Share this article on

The Australian dollar is one of the most popular currency pairs part of the FX dashboard. The main AUD pair, the AUDUSD, has tight spreads at most brokers and favored by the retail trading community.

Also called the Aussie pair, the AUDUSD reflects the differences between the Australian and the United States economies. However, when trading the Australian dollar, one should consider the uniqueness of the Australian economy too.

A mineral-reach country, Australia has a mining sector that weighs on its GDP. Over sixty percent of its exports are resources, and a big chunk goes to China (over 30%). Hence, when trading the Australian dollar, two things come to mind – commodities, and China.

Australian Dollar

Commodity Prices and the Australian Dollar

Because of its big mining sector, responsible for over 1% of the Australian industrial output, commodity prices have a strong influence on the value of the Aussie dollar. For example, a sharp appreciation of the local currency would not trigger the Reserve Bank of Australia intervention if, at the same time, the price of gold rose too. Hence, rising commodity prices tend to offset the currency appreciation.

There is a tight correlation between the price of gold and the Aussie dollar. The two are positively correlated, and 2020 showed perfectly how the correlation functions. As the price of gold reached new highs, trading above $2,000, the AUDUSD pair also rose from 0.55 in March 2020 to over 0.73 four months later.

Chinese Economic Performance and the Aussie Dollar

Because China is a big importer of Australian raw materials, the Aussie dollar fluctuates based on how the Chinese economy performs. In 2020, the Chinese economy will grow despite the pandemic, offering yet another explanation for the rise seen in the Australian dollar.

The Reserve Bank of Australia (RBA – Australian central bank) constantly monitors commodity market trends when setting the monetary policy. It meets monthly, on the first Tuesday of each month, except for January.

Also on the RBA’s radar list is the Chinese economic performance. Changes in the Chinese GDP or other economic data that may hint to slower growth may push the Australian dollar lower.

Australia registered one of the longest economic expansions prior to the COVID-19 pandemic. One of the reasons for its outperformance was the strong growth rate registered by China in the last decades.

Therefore, when trading the Aussie dollar, one must consider not only the local monetary policy but also the Australian economy’s place in the global market. Monetary policy often comes secondary in importance when compared to the price of gold and the Chinese economy’s evolution.

More articles on Currencies