Traders’ Guide to the AUD/JPY Pairing
Although both the Australian Dollar and Japanese Yen are major currencies within the global Forex market, they are not a major pair or a major commodity pair. Japan and Australia have a very close trading partner relationship; however, the Japanese Yen has a much stronger relationship to the US Dollar than the Australian Dollar has, and this means that any change in the American economy can have a significant effect upon the AUD/JPY pairing. As is the case with the majority of Australian Dollar pairings, the most successful way to profit is from commodity price changes, and this is especially the case with this currency pairing, as Japan relies heavily on Australian heavy commodities to supply its industry. Intermittently, there are also opportunities to trade these two currencies as a carry pair.
Facts About the Australian Dollar and the Australian Economy
The Australian, or Aussie, Dollar is not only the currency of Australia, but also of three Pacific Island states: Tuvalu, Nauru and Kiribati, as well as Cocos Islands, Norfolk Island and Christmas Island. The Australian Dollar is the world’s fifth most-traded currency, and it accounts for almost 8% of the daily share of world trading behind the USD, Euro, Japanese Yen and British Pound Sterling. It is a popular currency with Forex traders as there are fairly high interest rates in Australia, and their foreign exchange market is relatively free from government intervention. Australia also enjoys a fairly stable political system and economy, and the AUD is therefore a good choice of currency for diversifying a Forex portfolio. Another appealing factor is the Australian Dollar’s greater exposure to the economies of Asia. The AUD debuted on the world market in 1966, and its interest rate was initially linked to the GBP. In 1983, however, it became a floating currency, and this is still the situation today. The Australian Dollar is a popular carry currency as the nation’s interest rates are consistently high, and there is very little intervention by the country’s government.
Australia has a stable and resilient economy, even despite a recent decline in mining in the country. The nation’s economy is primarily dominated by the service sector, which contributes almost 70% of its GDP. Its mining and agricultural industries are also extremely important, being responsible for around 12% of Australia’s GDP. Most of Australia’s products are exported to the market in East Asia, and its primary commodity exports include crude oil, gold, coal, iron ore and natural gas. This has led to the AUD becoming the sixth most-traded world currency [it says fifth in the second paragraph up above.].
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The Japanese Yen and the Economy of Japan
Japan has the third-largest economy in the world according to its nominal GDP, and it is also the fourth largest in terms of its PPP. It has the second-largest developed economy, with the country’s GDP per capita being around $38,000; although as the JPY is a volatile currency on the exchange market (read more here), its GDP when measured in USD fluctuates considerably. Japan has a strong manufacturing economy and is the third-largest automobile manufacturing nation in the world. It also has the biggest electronics industry, and has often been named as one of the most innovative countries worldwide. Today, due to increased competition from South Korea and China, Japan’s manufacturing tends to focus primarily on precision and high-tech goods such as robotics and hybrid vehicles.
The Japanese Yen is the nation’s official currency, and is the third most frequently traded currency after the US Dollar and the Euro. After the US Dollar, Euro and Pound Sterling it is also a popular reserve currency with international central banks. For many years, the Japanese Yen’s exchange rate was pegged to the USD; however, since 1973, its exchange rate has been floating. The economy of Japan is also supported by the country’s domestic resources, including silver, magnesium and gold. There are enough of these stored resources to meet the current economic demand; however, the nation is dependent on several other countries for the minerals they require for modern industrial purposes.
Unique Factors That Affect the Australian and Japanese Economies
While standard factors such as interest rates play a major role in determining the exchange rate of the AUD, there are other factors that are unique to Australia. These include the following:
- Reliance on commodities – Australia has a fairly small domestic industrial base, and therefore relies heavily on commodities. This makes it more complicated to control Australia’s inflation and interest rates, which has led to a persistent account deficit for the country.
- Volatility – The AUD is particularly volatile. While the majority of developed economies are known to trade in tandem due to the trade links between them, the economy of Australia differs. There are few manufacturing exports, and most of those go to Asia. This means that the health of the country’s economy is strongly tied to commodity prices, and that creates a lot of volatility in the currency.
- Carry trade – The AUD/JPY pairing is popular with those who use the strategy of carry trading. This is because Japan has low interest rates, while the interest rates in Australia are high. Another bonus is that the regions have overlapping time zones. Both of these factors mean that any speculation that the interest rate in either country will change will lead to a disproportionate effect on both currencies.
- Regional factors – Australia benefits from a pro-business environment and a stable government. However, within its region, there has recently been an impact from the rise of China, with increasing numbers of South East Asian investors placing their assets there. Both China and India have an impact upon economic performance and trade in Australia, as they are both important importers of Australian commodities; and in turn, Australia imports a large amount of consumer goods and machinery from both of these countries.
There are also unique factors that affect the Japanese economy. These include the following:
- Natural disasters – Because of Japan’s size, any natural disaster will have a major impact upon the country, thus affecting the Yen’s exchange rate.
- Oil prices – Japan needs to import most of its oil, and therefore if oil prices see a hike, Japanese products cost more, which is bad for the nation’s economy.
- Manufacturing demand – The Japanese economy is heavily dependent upon manufacturing. As a result, if output and demand are low, the Yen will suffer.