Last update: 13 May 2020
5 min read

How to Trade AUD/USD Forex Pair

The AUD/USD currency pairing is one of the most aggressive currency pairs in the financial markets and is the sixth highest pair for trading in the world, accounting for around 7% of all worldwide currency trades annually. The AUD/USD fluctuates frequently in line with gold prices and, similarly to the New Zealand Dollar, the Australian Dollar is often referred to as a Commodity Currency as the nation’s economy is driven by commodities. The behaviour of the Australian Dollar – its spikes, strength, swings and weaknesses – depend on commodity prices, mainly comprising farms and minerals. When the price of minerals drops, the AUD will often see a crash or fall, whereas it will generally move upwards in a phase of global expansion. Any investor who is interested in trading this currency pair should ensure they educate themselves before leaping in as the AUD to USD pairing has a great many fluctuations and price movements with many influences affecting the currencies’ movements.

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Important Information About the Australian Dollar

At one time, the Australian Dollar was connected to the British Pound with the Pound controlling the AUD’s value. As a result of this, the Australian Dollar would rise and fall in value in correspondence with the Pound. However in 1946 there was a change and the Australian Dollar became pegged to the United States Dollar instead for a short period before resuming its original status. In 1966, the Australian Dollar was launched as a decimal currency with a deregulation of the country’s financial system following on. This had an impact on fluctuations in worldwide exchange rates while the open-market system became the focus of the operating system of the nation’s Reserve Bank. By 1983, the AUD USD began to show its strength in the foreign exchange market. Today, the Australian Dollar is primarily dependent upon its merchandise and commodity exports such as copper, iron and gold. These account for around a billion Australian Dollars, accounting for about 50% of the country’s overall exports. Any change in the commodities market tends to bring movement and volatility to the value of the AUD, although for around 15 years the AUD has been growing a stable rate. Its position has been consolidated over recent years thanks to the consistent growth in China since many of Australia’s exports are sent to China, strengthening the Australian Dollar’s value.

Facts About the United States Dollar

Within the international financial world, the United States Dollar has its own unique and specific function. Being the currency that is most frequently accepted for global reserves, the US Dollar is also the currency most commonly used for settling financial transactions between countries, and world central banks usually hold the majority of their foreign currency reserves in the Dollar. The US Dollar is such a strong currency that there are several small countries which have chosen to use the USD as their own currency rather than creating their own, or peg their own nation’s currency to the US Dollar’s value. The US Dollar is used to set gold prices and the prices of several other commodities, and it is also the currency that has been selected the OPEC countries when they are conducting their worldwide oil transactions. These many and varied factors all have a part to play in making the US Dollar the world’s most important and frequently traded currency. More currencies are traded against the US Dollar than against any other form of worldwide currency. It is therefore exceptionally important that anyone who is keen to involve themselves in the Forex trading market pays close attention to those factors which drive the US economy and the direction in which the Dollar is trading before executing their first trade.

Which Factors Influence the AUD/USD?

aud-usdThere are several factors which come into play relating to the value of the Australian Dollar and the United States Dollar. These influences include:

  • Interest rate differences – the difference in interest rates between the Federal Reserve and the Reserve Bank of Australia will impact upon the AUD/USD exchange rate. At the present time the Australian economy is functioning well and progressing upwards and therefore it is likely that the AUD value will continue rising.
  • Commodity prices – when commodity prices rise, the strength of the Australian Dollar increases due to the strong correlation between commodity trading and the Australian economy. When the prices of commodities drop, the Australian currency must necessarily also weaken.
  • GDP and Unemployment Data – these are key economic indicators of the health of the country’s economy and have a major influence on the exchange rate between the two currencies.

Why Trade the Australian Dollar to United States Dollar?

There are several good reasons for Forex traders to choose the AUDUSD pairing:

  • Best Performing Major Currency – the AUD has become the top performing major currency recently and has had an increase of more than 30% over the USD.
  • Export Driven Economy – the Australian economy is export driven and commodity based while having a strong foundation on a central bank. The country has had many consecutive years of economic growth, avoiding the global economic downturn that has hit many other economies over the last few years.
  • Chinese Trading RelationsAustralia has a strong trading relationship with China which has enabled the country to respond more effectively to the global financial crisis. Commodity prices have therefore been able to remain on an upward path, maintaining the stability of the Australian dollar.
  • Climbing GDP – the Australian GDP is on the rise and their economy is expected to continue growing over the next few years.
  • Increase in AUD interest rates – the Reserve Bank of Australia has been able to increase the currency’s interest rates which makes their currency more appealing to investors.

Overall, there is very strong liquidity in this currency pairing, so it is easy to see why so many Forex investors choose these currencies to execute their trades.

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