The Australian to US dollar currency combination, also known as the ‘Aussie,’ is a major forex pair that accounts for about 5% of total FX market trade. The Australian dollar against the US dollar currency pair is abbreviated as AUDUSD. It expresses how many US dollars are required to buy one Australian dollar unit. The base currency is the Australian Dollar (AUD), and the quote (or “counter”) currency is the US dollar (USD). The AUDUSD currency pair is typically tied to commodity prices and market risk sentiment.
History of AUD
The AUD took the place of the pound. Until the British pound sterling depreciation in 1931, the Australian pound remained tied to the British pound for decades. In the 1960s, the country opted to abandon the old imperial system in favor of the Australian dollar, a decimal currency.
The trading relationship between Australia and China, with Australia having a big trade surplus, has historically been one of the drivers supporting the AUD. The AUD’s rise and fall is still heavily influenced by this relationship.
Why should one trade the pair?
From Monday to Friday, the Aussie currency pair is available for trading 24 hours a day, providing a smooth trading experience with typically simple entry and exit conditions.
According to the Bank of International Settlements, the Australian dollar is the fifth most traded currency in the worldwide foreign exchange market, accounting for 6.8% of global forex turnover in 2019.
The pair is seen as a risky or growth-oriented currency. Due to Australia’s considerable raw materials exports, the AUD can be particularly susceptible to commodity price movements.
The AUDUSD, as a widely traded currency pair, might have a relatively tight spread for retail traders. This can lower the overall cost of trading, which is an important factor to consider when selecting a currency pair.
Because it is one of the most traded currencies in the world, the AUDUSD is extremely liquid. High liquidity facilitates trade, reduces slippage and costs, providing greater market depth, which protects against external shocks. Forex liquidity is important for forex traders because it measures a currency pair’s ability to be traded on-demand and move without large price variances when bought and sold in large amounts.
Fundamental analysis
The RBA and the Fed’s monetary policy
The central banks’ policies in Australia and the United States have the most impact on the pair. The pair will have a stimulus to grow if the RBA decides to start a series of interest rate increases while the Fed keeps the rate at its current level. In the other direction, a rise in the Fed’s rates, combined with a lack of such an increase on the Australian side, sets off a downward trend in the exchange rates.
Global commodity prices
Despite it being young, Australia has one of the world’s most developed economies. Gold, iron, diamonds, mineral resources, uranium, and coal are among the country’s natural resources. Their exports account for a significant portion of the country’s revenue.
As a result, rising worldwide prices for commodities including iron ore, industrial metals, gold, silver, coal, and others strengthen the Aussie exchange rate. When the price of these commodities falls due to a global economic crisis, the pair quotations fall as well. The pair has a strong correlation with gold prices: as the price of gold rises, the price of the pair rises as well.
Australia’s and the United States’ economic indicators
Statistical agencies in the United States and Australia produce data about the economies of the two countries on a regular basis. The following are the most important indicators: gross domestic product, inflation, consumer price index, import and export balance, producer price index, political influence, especially when there is a public speech, and the unemployment rate.
Technical analysis
Long trade entry
With a stop below the breakout point, enter on breakouts of key resistance areas. Most of the time, bullish breakouts of falling trends also produce strong buy signals.
Trading the AUDUSD involves patience in many instances, and while the moves may appear slow at first, they eventually continue to march up and higher. Traders can join the trade by using trendlines and important support levels during trends.
Stop-loss
Set stops behind key support areas, but be cautious of the process involved in the steps, which are common on the AUDUSD. Before completing a reversal, this pair checks and re-tests support and resistance zones, frequently pushing the price a few pips higher/lower to take out stops.
Targets
On the chart, look for resistance zones that are more likely to be respected. Resistance trendlines and the upper end of channels provide good levels to targets. On the AUDUSD, taking profits at Fibonacci extensions and retracements is a smart approach.
Short trades entry
After bearish signals form, look to enter near resistance lines or other resistance areas. Breakouts of support that are bearish also provide strong selling opportunities.
Stop-loss
When trading bearish breakouts, look to put stops above a resistance zone or a breakout point.
Targets
Targets should be placed around the horizontal support zones from previous key lows.
Correlation with other pairs
The relationship between two assets and how they move in regard to each other is referred to as correlation. Correlation is a vital component of advanced portfolio management for maximizing risk-adjusted returns. When two pairs move in the same direction, there is a positive correlation; when they move in opposing directions, there is a negative correlation; and when the pairs move arbitrarily with no discernible link, there is no correlation. AUDUSD is positively correlated to AUDCAD, NZDUSD, GBPUSD, EURUSD, EURCHF. It is negatively correlated to USDCHF, USDTRY, USDJPY, USDSGD, and USDCAD.
Conclusion
The AUD replaced the pound and is now one of the most widely traded currencies. The AUDUSD pair remains popular among traders due to its strong liquidity, availability, ability to trade in different sessions, and minimal spread. Newbies should practice trading the pair on a demo account first, whether it’s a short or long trade, to learn the best strategies before switching to a real account only when they’ve had consistent positive outcomes. Always remember to set a stop loss when trading. As a major currency, it is positively and negatively correlated with numerous pairs.