The Australian and US dollar pair are two of the most frequently traded currencies in the market. The Australian dollar has only been a free-floating currency since 1983 yet remains a popular Forex-traded currency.
The Aussie dollar owes its popularity among forex traders to its geology, geography, and trade-boosting government policy.
Unique geology has given the country a wealth of natural resources including oil, gold, agricultural products (such as beef and wheat), diamonds, iron ore, and coal.
Australia is also unique in terms of its geography. Its location positions it as a choice trading partner for many Asian economies such as Indonesia, Malaysia, China, Japan, and India. These developing countries have a near nearly insatiable demand for natural resources.
Australia’s government policy has led to consistent interest rates, a stable democratic government, and a robust economy. This makes it an attractive trade partner for the USA as it’s a stabilizing presence for Western business interests in the region.
AUD/USD TRADING BASICS:
WHAT IS The AUD/USD currency pair?
The AUD/USD is the abbreviation for the Australian Dollar / US Dollar currency pair in forex. In terms of forex, it measures how many US Dollars are needed to purchase a single unit of the Australian Dollar. The Australian Dollar (AUD) in this case is the base currency and the US Dollar (USD) is the quote (or counter) currency in the pair. The AUD/USD is one of the most widely traded currency pairs in forex trading. It is usually linked to commodity prices (gold and oil) and continuing volatile market risk sentiment.
WHY TRADE AUD/USD PAIR
The Australian Dollar is the fifth-most traded currency on the global foreign exchange market. It accounted for 8% of the world’s forex turnover in 2020, according to the Bank of International Settlement (BIS). The AUD/USD is perceived as a risk-linked or growth-linked currency as both economies are incredibly robust. The US economy is the strongest in the world yet Australia consistently is rated as one of the top economies in the Asia/Pacific region. The AUD is highly prone to any movement in commodity prices. This is due to Australia’s incredibly large raw material export market.
There are 3 popular methods of trading this currency pair, which are the following:
Physical currency – Traders have the option of trading physical currencies at their bank or other financial institutions. This method is time-consuming and takes longer to show a return on investment.
Futures – Trading derivative products such as futures and options are yet another option, which enables traders to trade an asset at only a fraction of its actual price. It does, however, carry a potential risk to your invested capital if the trade ends up going against your original speculation.
CFDs – Last but not least, you have the option of trading contracts for difference via CMTrading; essentially, you’re trading the difference between the currency pair’s values when the position opened and when it closed.
What factors influence the AUD/USD?
The Australian dollar is among the top five most frequently traded currencies in the world. Given Australia and the USA’s status as export-driven economies, their top priorities are keeping inflation low, prices stable, and interest rates high. This makes these currencies’ relationships with one another more susceptible to the influence of local economic events (I.e., weather, politics) than to trends on the global market.
The AUD/USD is preferred by forex traders for its liquidity, good spreads, and link to global economic trends. The pair reacts swiftly to economic data and central bank policies, offering trading opportunities.
The Australian dollar’s market value is affected by weather cycles, harvest, mining output, and the volatility of metal’s market prices due to its heavy reliance on commodities such as grains and metals. This makes its currency counter-cyclical and volatile; it is closely tied to the price of commodities, any shift in value or output will trigger volatility and negatively affect the AUD.
What to consider when trading the AUD/USD
The AUD is a risk-linked currency, sensitive to overall trends in market sentiment. The price of Australia’s main commodities (iron ore, gold, coal, and copper) is a major influence on the AUD/USD. Studying these commodity correlations and can improve all traders’ performance.
The AUD/USD is also affected by the Chinese financial market, due to the close economic ties between the two countries. Any changes in Chinese trade, GDP and commercial exports will rapidly affect the AUD.
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