What is AUD/USD?
AUD/USD is the currency pair that shows the value of the Australian Dollar against the US Dollar. The left side of the pair is called the base currency, in this case the AUD, and the right side is called the quote currency, in this case the USD. This exchange rate tells you how many US Dollars you need to buy one Australian Dollar. For example, if the AUD/USD pair is trading at 0.6300, it means that you need 0.6300 US Dollars to buy one Australian Dollar. So, when the pair is going up in price, the Australian Dollar is said to be appreciating or getting stronger and the US Dollar is depreciating or getting weaker, and vice versa when the pair is going down in price. The Australian Dollar is also nicknamed “the aussie”.
What are common charts to use when trading AUD/USD?
There are different ways you can display the exchange rate price movements on a chart. The most common ways include a line chart or a bar chart, but the most popular and used one is the candlestick chart. The candlestick chart shows you instantly and in real time where the price has opened, closed and how much up and down it went on any given timeframe.
Let’s say you want to check AUD/USD price on a daily timeframe. You go to your charting software, select the timeframe and select the candlestick chart (if it’s not set by default). This is what you would see on tradingview.com
Is AUD/USD an easy pair to trade?
AUD/USD can be a very good pair to trade when you have a monetary policy divergence between the two central banks backing the currencies, the Reserve Bank of Australia (RBA) for the AUD and the Federal Reserve (the Fed) for the USD. For example, if the Federal Reserve is about to start tightening its monetary policy raising interest rates and the Reserve Bank of Australia is cutting them or not doing anything, then you have a policy divergence and, in such cases, you would see the relative currency pair AUD/USD depreciate or going down. Below you can see the chart showing how from 2012 to 2020 after the infamous “taper tantrum”, as it was called when the Fed signalled that it would scale back its asset purchases, the market expected the Fed to raise rates in the near future, but the Reserve Bank of Australia remained dovish and kept on cutting interest rates creating the divergence and a depreciation in the pair of more than 40%.
Another thing to remember is that the USD is considered a safe haven currency. This means that in times of risk aversion in the market, the USD tends to appreciate against the AUD even if there’s no monetary policy divergence between the two central banks.
What session is best to trade the AUD/USD?
The best times to trade AUD/USD is during the European and North American Session. This is because in the Asia-Pacific (APAC) Session there’s less volume and even though the news for Australia is released in the APAC session and can offer good trading opportunities, the movements get extended during the next two major sessions.
Moreover, in the North American session the news for US is released and they are always the most important as the US is the biggest economy in the world and it can single-handedly spur global growth or bring the whole world into a recession as we saw in the 2008 with the Global Financial Crisis (GFC). The Federal Reserve is also the most important central bank in the world.
Why is AUD/USD important?
Currency exchange rates are important for the respective countries. A weak currency can increase exports and thus growth because foreigners will have a stronger currency and more purchasing power leading to them demanding more goods and services from the country that has a weak currency. A too weak currency though can spell trouble because it may increase inflation and the central bank has a mandate of keeping inflation stable, so if it increases too much, the central bank will start to increase interest rates which will strengthen the currency. On the other hand, when the currency is too strong it increases imports and diminishes exports because foreigners will buy less goods and services because their purchasing power will be weaker. This can create a trade deficit (more imports than exports). AUD/USD is also important as a global growth barometer as the AUD as a commodity currency is sensitive to global growth prospects and depreciates when growth is expected to slowdown and appreciates when it’s expected to rise.
Will AUD/USD go up or down in 2023?
In the current context of global slowdown, recessions, high inflation and cost of living crisis, the AUD/USD pair should maintain the downtrend. In 2023 though things may change. The recession is caused by high inflation and aggressive monetary tightening from central banks. Recessions are deflationary and we have already seen signs of inflation easing from forward looking indicators like PMIs. So, once central banks see that the inflation risk has been taken out, they will start to focus on growth and start again cutting interest rates and probably new quantitative easing programmes. This will make the market to expect better times ahead and higher liquidity will increase risk appetite. All in all, we may see AUD/USD bottoming probably sometime in Q2/Q3 of 2023 and start an uptrend from there.
Is AUD/USD a risk asset?
AUD/USD is considered a barometer for risk sentiment. It goes up when things look bright and goes down when things look bleak. This makes the AUD/USD pair a risk asset. The AUD is a commodity linked currency and therefore it’s very sensitive to global growth expectations, while the USD is a safe haven currency, and it sees inflows in times of risk aversion and stress in the markets. So, when you have a bad outlook for the global economy for the next 6-12 months, you should look for short opportunities and when you have a good outlook you should look for long opportunities. This big picture view will help you filtering lots of noises coming from day-to-day news and price action.
So, when you have a bad outlook for the global economy for the next 6-12 months, you should look for short opportunities and when you have a good outlook you should look for long opportunities. This big picture view will help you filtering lots of noises coming from day-to-day news and price action.
Is AUD/USD strong?
As of now the AUD/USD pair is in a clear and strong downtrend. This is because there’s an expectation of a global recession caused by high inflation and aggressive monetary tightening. In such a scenario, commodities prices generally fall and AUD, being a commodity linked currency, suffer losses. In the chart below you can see that the pair has been in a downtrend for several months and it’s expected to keep falling for some others.
How to trade AUD/USD?
The best way to trade currencies in general is to have a fundamental idea for direction, which is generally based on macroeconomics such as central bank’s monetary policy, growth, inflation and so on, and technical analysis for risk management. For example, let’s say that you view the global slowdown and aggressive Fed as a tailwind for the USD in general. So, you will want to mainly take short positions in AUD/USD. You also need to manage your risk though. Where can you enter in order to have a small risk exposure but a bigger profit potential? You can use technical analysis.
So, you open the AUD/USD chart and use technical concepts like support and resistance, trendlines, Fibonacci ratios, indicators and so on to decide where to open a trade. For example, in the chart below you can see how you could use the neckline of the head and shoulders pattern as a resistance level coupled with the downward trendline as confluence for you entry. You could place a stop loss above the most recent swing level, so your loss would be little and limited. Your target could have been the usual measured move of the distance of the head from the neckline or you could let your trade run for more if the fundamental reasons were on your side. This way you can risk a little to make more than a little.
Where can I trade AUD/USD?
You can trade AUD/USD or any other Forex pair with a broker. Always choose a good, reputable, and regulated broker to avoid unnecessary problems. When you open a trading account with a broker, you will have to supply your KYC documents and, once approved, deposit money to be able to trade. Finally, you can use the broker trading platform to execute your trades. Most retail brokers let you also trade on MetaTrader 4 or MetaTrader 5, which are two of the most famous and popular trading platforms among retail traders. Most retail brokers offer CFD trading for Forex, although you can also trade AUD/USD via other derivatives like futures or options that trade on exchanges but are more expensive than CFDs.
AUD/USD correlation
AUD/USD as many other major pairs has a correlation with global growth. For the Dollar Smile Theory, the USD appreciates both when there’s a synchronised global slowdown and when the US economy outperforms its peers. On the other hand, when there’s global growth USD weakens and currencies like AUD, CAD, NZD, EUR, and so on appreciate against it. To show this correlation, we can take the US ISM Manufacturing PMI, which is correlated with Global PMIs since the US is the biggest economy in the world and compare it with AUD/USD chart. Below you can see how the changes in the ISM PMI (orange line) have an inverse correlation with AUD/USD (blue line). Thus, if you expect global growth to slow down, you may want to look more for shorts on AUD/USD and vice versa if you expect a stable or higher global growth.
Another important correlation you should be aware of is that between the currency pair and the yield spread. Generally, investors care about three things: return, risk and liquidity. Bonds interest rates are called yields, that’s how much you will get every year if you buy the relative bond. So, if you can get a higher return in a country than another, you would take the chance, right? But investors also care about the risk and liquidity. The risk is that you may get a lower return compared to inflation and/or future interest rates and liquidity is how easy and fast it is to convert an asset into cash. So, if those last two things are seen as bad for an investor, then even if the return is higher, the investor would shy away from putting his money into that country.
Below, you can see the yield spread between the US and the Australian bonds (blue line) and AUD/USD exchange rate (orange line). You can see how the currency pair is correlated with the yield spread. Sometimes though there are divergences and those happen because of other fundamental things happening in the economies or the world. That’s why it’s important for you to keep up with the ongoing developments in the world to always be aware of what’s going on and what may happen next.
