The AUDUSD Currency Pair
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, USD is ranked as the most frequently traded currency in the world, while AUD ranks fifth.1)Retrieved 5 October 2016 http://stats.bis.org/statx/srs/table/d11.3
AUD/USD is considered to be a commodity pairing, which involves currencies from countries that have large quantities of raw materials. There are three commodity pairs in forex: AUD/USD, USD/CAD, USD/NZD.
In the case of 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, ranking second and third respectively.2)Retrieved 5 October 2016 https://dfat.gov.au/about-us/publications/Documents/australias-gold-industry-trade-production-and-outlook.pdf In addition, the United States is the world’s fourth-largest exporter of gold (US$19.3 billion annually), while Australia is the seventh-largest global exporter (US$10.7 billion annually).3)Retrieved 5 October 2016 http://www.worldsrichestcountries.com/top_gold_exporters.html
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.
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.
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. For example, for the first quarter of 2016, AUD had a cash rate of 2%,4)Retrieved 6 October 2016 http://www.rba.gov.au/statistics/cash-rate/ while the United States Federal Reserve had installed a rate of .5% upon the USD.5)Retrieved 6 October 2016 http://www.tradingeconomics.com/united-states/interest-rate Because AUD offered a superior rate of return than that of USD, AUD/USD became a vehicle for investors to capitalise on the interest rate discrepancy.
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.
No matter which style of market participation is preferable, AUD/USD is a prime candidate for active trade.
Key Facts: AUD/USD
Australian Dollar (AUD)
- Currency overview: AUD is the official currency of the Commonwealth of Australia. For the year 2016, it ranks as the fifth-most-traded currency in the world behind USD, EUR, JPY and GBP. AUD accounts for nearly US$353 billion in turnover per day, representing 7% of all global foreign currency transactions.6)Retrieved 4 October 2016 http://stats.bis.org/statx/srs/table/d11.3 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.7)Retrieved 3 October 2016 http://www.australian-coins.com/australian-decimal-changeover/c-day-14th-february-1966-from-pounds-to-dollars-decimal-changeover-day/
- 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 as Australia ranks 27th in total exports. Key exports are coal, iron, gold, meat and wheat.8)Retrieved 3 October 2016 https://www.cia.gov/library/publications/the-world-factbook/geos/as.html” 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.9)Retrieved 4 October 2016 https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2014/01/03/Understanding_The_Forex_Majors.html It is a major pairing when crossed with USD, and is often traded in concert with GBP and JPY.
United States Dollar
- 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.” USD acts as the world’s reserve currency, with 62% of global foreign exchange reserves held by central banks being denominated in USD.10)Retrieved 22 March 2016 http://www.businessinsider.com/dollar-as-international-reserve-currency-2013-11
- 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.11)Retrieved 22 March 2016 http://www.advfn.com/currencies/usd/about/USDollar.html 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. The US accounts for nearly 25% of global GDP annually.12)Retrieved 22 March 2016 http://www.economywatch.com/world_economy/usa/
- 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.13)Retrieved 22 March 2016 http://useconomy.about.com/od/glossary/g/dollar-peg.htm
- Four currency pairings including USD are referred to as “majors.” USD/JPY, GBP/USD, USD/CHF and EUR/USD.
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