The currency pairing of the Australian dollar (AUD) and the United States dollar (USD) is one of the most commonly traded pairs on the forex market. From a volume-traded perspective, both are classified as major global currencies. According to the International Bank of Settlements Triennial Survey 2019, the USD is ranked as the most frequently traded currency in the world with an average daily turnover accounting for 88% of the total forex handle. The AUD ranks fifth, responsible for 7% of average daily turnover.
Commonly referred to as the Aussie, the AUD/USD is considered to be a commodity currency pair. Also known as commodity dollars or "comdolls," commodity pairs involve countries that produce, import or export large quantities of raw goods. There are three major commodity dollars on the forex: AUD/USD, USD/CAD, NZD/USD. The associated commodities are gold, crude oil and dairy products. Generally, as prices of these items fluctuate, the AUD, CAD and NZD may post either a bullish or bearish breakout versus the U.S. dollar.
In the case of the AUD/USD, the commodity that serves as a catalyst for exchange rate valuation is gold. Both the United States and Australia play a key role in the global production of gold. For the year ending 2018, Australia ranks second in gold production with a total output of 314.9 metric tons. The United States comes in fourth globally, with production of bullion totalling 221.7 metric tons. In addition, the United States is the world's fifth-largest exporter of gold (US$17.2 billion, 5.8% annually), while Australia is the sixth-largest global exporter (US$16.2 billion annually).
It's important to recognise that the impact of gold pricing is very different on each currency. In respect to USD, gold has an inverse relationship. Conversely, an appreciating value of AUD is positively associated with robust gold pricing. The conventional wisdom is that AUD/USD exhibits a long-term positive correlation to the price of gold. When the correlation is strong, forex traders apply technical analysis to gold to determine overall market state. A prevailing bullish or bearish trend in bullion is a key factor in whether or not to buy or sell the AUD/USD.
In addition to being commodity driven, AUD/USD has been a vehicle by which to execute a carry trade. A carry trade is one in which an individual borrows money at a low interest rate and reinvests the borrowed capital in an asset that will provide a larger return. Amid prolonged uncertainty, as created by the COVID-19 pandemic and Brexit, many forex participants placed carry trades to mitigate heightened systemic risk.
History Of The AUD/USD
Historically, AUD has been a prime candidate for currency carry trades, because the Reserve Bank of Australia typically holds higher interest rates than those of other developed countries.
2020 proved to be a challenging year for the global economy. Subsequently, central banks around the world implemented intermediate-term dovish monetary policies. For example, for 7 May 2020 the AUD had a cash rate of 0.25% while the United States Federal Reserve had installed a rate of 0.0% upon the USD. Although these values were historically low due to the coronavirus pandemic, interest rates of the AUD remained marginally higher than those of the USD. Although the Australian dollar only offered a marginally better rate-of-return than the U.S. dollar, the AUD/USD exchange remained a vehicle for investors interested in executing carry trades. In fact, many institutional investors preferred executing the Aussie carry trade instead of trying to pick bottoms in the FTSE 100, CAC 40 or the NASDAQ.
Throughout 2020, the near-zero interest rate environment became a staple of the international monetary system. In fact, as coronavirus cases rose toward year's end, both the Reserve Bank of Australia (RBA) and Fed held interest rates at historic lows. For November 2020, the U.S. federal funds target rate fell between 0.0% and 0.25%, while the RBA promoted a 0.10% cash target rate. Although the COVID-19 pandemic negatively impacted economies around the globe, the AUD/USD currency pair continued to be a viable carry trade alternative.
Why Are Investors Attracted To The AUD/USD?
Traders and investors are attracted to AUD/USD for several reasons.
- The liquidity of the pair appeals to intraday traders looking to implement strategies aimed at profiting from short-term exchange rate fluctuations.
- Investors frequently take positions in AUD/USD with the goal of achieving long term capital appreciation.
- The AUD/USD offers a way for traders and investors to indirectly address the global gold markets.
- During times of extreme pricing volatility, the AUD/USD may be used as a hedging mechanism against inflation or deflation.
- Consistent liquidy and price action make the Aussie a prime candidate for technical traders. Momentum oscillators, support & resistance levels and candlestick charts are routinely applied to the AUD/USD.
- Both the USD and AUD are managed by a central banking authority and backed by their respective governments. In comparison to cryptocurrencies, the AUD/USD enjoys a lower risk profile and the security of being a conventional financial instrument.
No matter which style of market participation is preferable, AUD/USD is a prime candidate for active trade.
Past Performance: Past Performance is not an indicator of future results.
Key Facts: AUD/USD
Australian dollar (AUD)
- Currency overview: AUD is the official currency of the Commonwealth of Australia. For the year 2019, it ranks as the fifth-most-traded currency in the world behind USD, EUR, JPY and GBP. The AUD accounts for nearly US$447 billion in turnover per day, representing 7% of all global foreign currency transactions. It also serves as a key facilitator of trade between the countries of the Asia-Pacific region, as well as being a safe haven for global currency investiture. In addition, the typically larger interest rate of AUD is often sought after for use in carry trades with other global currencies.
- Currency code: AUD
- Central bank: Reserve Bank of Australia
- History: The origins of currency in Australia can be traced to 1788 and the use of the British pound in the settlement of New South Wales. Beginning in 1825, silver and bronze British coins were minted in Australia and used as currency. These coins were used until 1910 and the creation of the Australian pound. The Australian pound was pegged to the value of the pound sterling, and paper banknotes were issued three years later. The Australian dollar replaced the pound on February 14, 1966. AUD was a decimalised currency, with one dollar being equal to 100 cents.
- Economy: Australia ranks 19th globally in terms of GDP purchasing power parity. Australia is a service-based economy, with the service sector accounting for 70% of all jobs. The exportation of commodities plays a major role in the economy, with Australia ranking 22nd globally in total exports. Key raw material exports are coal, iron ore, gold, natural gas and beef. The largest trading partners for Australia are China, Japan, South Korea and the United States.
- Currency subunits: 1 AUD consists of 100 cents
- Denominations: Bills: AU$5, AU$10, AU$20, AU$50, AU$100; Coinage: ¢1, ¢2 ¢5, ¢10, ¢20, ¢50, AU$1, AU$2.
- In addition to being the official currency of mainland Australia, AUD is used as legal tender in the following regions and municipalities: Christmas Island, Cocos (Keeling) Islands, Kiribati, Nauru, Norfolk Island, Ashmore and Cartier Islands, Australian Antarctic Territory, Coral Sea Island, Heard Island, and the McDonald Islands.
- AUD is considered one of the eight major global currencies. It is a major pairing when crossed with USD, and is often traded in concert with GBP and JPY.
United States dollar (USD)
- Currency overview: USD is the official currency of the United States and its inhabited territories. USD is a decimalised currency, as one dollar consists of 100 sub units called "cents." The USD acts as the world's primary reserve currency, with 61.86% of global foreign exchange reserves held by central banks being denominated in USDs. This value totalled US$6.79 trillion as of the second quarter 2019.
- Currency code: USD
- Central bank: United States Federal Reserve
- History: The Coinage Act of 1792 put into place the United States' first organised monetary system. Paper banknotes (dollars) were introduced into circulation in the mid-1800s, via creation of the US Treasury by Congress. The Federal Reserve act of 1913 created the central bank of the US, the Federal Reserve. Through the introduction of the Bretton Woods monetary system in 1944, USD became the world's reserve currency.
- Economy: The United States economy is considered to be a "mixed" economy, with both private industry and governmental intervention contributing to the overall economic output. At year end 2019, the US accounted for 23.89% of global GDP, a value of US$20.49 trillion.
- Currency subunits: 1 USD consists of 100 cents
- Denominations: Bills: $1, $5, $20, $50, $100; Coins: 1c, 5c, 10c, 25c, 50c, $1
- Sixty-six countries peg the value of their currency to USD, or directly use USD as their national currency.
- Four currency pairings including USD are referred to as "majors." USD/JPY, GBP/USD, USD/CHF and EUR/USD.
This article was last updated on 5th January 2021.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…