The currency pairing of the euro (EUR) and Australian dollar (AUD) affords forex market participants several unique trading and investment opportunities. Global economic cycles, fluid monetary policy and variance in commodity pricing can create favourable intraday and long-term trading circumstances. In addition, outlier events such as pandemics, brush fires and trade wars are capable of fostering unique market conditions in the EUR/AUD.
Both currencies are considered to be "major" global currencies and are among the top-eight most frequently traded in the world. According to the Bank of International Settlements (BIS) Triennial Survey 2019, the euro (EUR) is the second-most traded currency in the world, accounting for 32% and US$2.129 trillion of the average daily forex turnover. By comparison, the AUD ranks fifth in this category, present in only 7% of transactions worth approximately US$447 billion.
Classified as a "cross currency pairing," also known as simply a "cross pair," EUR/AUD exists in isolation from the United States dollar (USD). In general, cross pairs enable currency traders to move from one international currency for another without first having to convert the base currency to US dollars. The streamlining of the exchange process reduces risk through eliminating potential pricing volatility related to the current valuation of the USD. In the case of EURAUD, euros are directly exchanged for Australian dollars without having to first convert euros to USDs.
EURAUD As A "Minor Cross"
It's important to recognise that although both the EUR and AUD are major currencies, the pairing of EURAUD is considered a "minor" cross. As of April 2019, the pairing ranked as the sixth-most frequently traded currency cross on the forex. Further, the EUR/AUD accounted for US$18 billion in average daily forex turnover, a relatively small 0.3% of the aggregate handle.
The limited trading volumes of the EUR/AUD contributed to its overall standing as the 28th most frequently traded forex pair. Unfortunately for short-term currency traders, consistently limited liquidity makes the EUR/AUD susceptible to market turbulence and periods of dramatic exchange-rate fluctuations.
The economies of the European Union (EU) and Australia are different in terms of size and scope. Although being comprised of 27 different nations and collectively ranking as the second largest economy in the world, the EU conducts limited trade with Australia. The United Kingdom is Australia's most significant trading partner residing in the EU, earning a rank of 8th in terms of two-way trade.
As of year-end 2018, the U.K./Australia relationship accounted for AUD$26,947 million in total trade, making it a key staple of both the Australian and European Union's foreign trade sector. However, upon the formalisation of Brexit proceedings in 2020, the EU and Australia will be forced to renegotiate commercial terms exclusive of the U.K.
Impact Of AUD As Commodity-Based Currency
The AUD is often thought of as a commodity-based currency, specifically in reference to its economic dependence upon gold production and exportation. Australia is the world's second-largest producer and transporter of gold, with exports totalling 314.9 tonnes annually.
When taking into account the amount of domestic economic output related to gold production in Australia, it's not surprising that the AUD shows a positive correlation to the pricing of gold. Typically, as the value of gold increases on global markets, the AUD increases in value.
This relationship can have a substantial impact upon the exchange rate volatility facing EUR/AUD. Data releases that impact gold valuation may spike intraday volatility facing the pair. In addition, market fundamentals related to Australia's gold-producing capabilities may act as a precursor to longer-term trends. Market participants need to be aware of economic data related to gold's valuation and Australian gold production.
Impact Of Other Market Drivers
However, other fundamental market drivers such as foreign trade, global economic cycle and geopolitical tensions often have a greater influence on the EUR/AUD than gold prices. The global debt crisis of 2008 serves as a prime example of global economic factors contributing to the exchange rate volatility of currency pairings, specifically cross pairs.
This was evident in the valuation of the EUR/AUD. During the peak of the crisis, from July 2008 to December 2008, the EUR/AUD experienced a substantial appreciation in pricing. Beginning on July 1, 2008, and ending on December 31, 2008, the EUR/AUD traded in a range between 1.6500 to 2.0800, and sustained over a 20% bump in rate. The increased range of price action was attributed to international currency traders seeking to protect wealth and possibly profit from economic uncertainty.
The exchange rate volatility present in EUR/AUD in 2008 serves as an illustration of its disposition. Even though the pairing can serve as a viable diversification tool or hedge against risk, it's also prone to substantial periodic swings in valuation. It's necessary for each trader or investor to decide if actively trading the EUR/AUD is a worthwhile endeavour.
Past Performance: Past Performance is not an indicator of future results.
Key Facts: EUR/AUD
- Currency overview: The euro is the official currency of the European Union. It has the largest circulation among currencies in the region and serves alongside the U.S. dollar and the Japanese yen as a major world reserve currency.
- Central bank: European Central Bank
- Currency code: EUR
- History: The euro was introduced in 1999 as the official currency of the eurozone, replacing the traditional currencies of 19 nations in the region.
- Economy: The eurozone economy is the largest economy of a supra-national economic bloc in the world, with a GDP of approximately €15 trillion.
- Currency subunits: 1 cent = 1/100 of a euro
- ● Denominations: Bills: €5, €10, €20, €50, €100, €200, €500; Coins: 1c, 2c, 5c, 10c, 20c, 50c, €1, €2.
- Countries and territories using the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Also, Andorra, Monaco, San Marino and the Vatican use the currency under an agreement with the European Union. Two other countries, Kosovo and Montenegro, have adopted the currency unilaterally without an agreement.
- Currencies pegged to the Euro: Benin franc, Bosnia and Herzegovina mark, Bulgaria lev, Burkina Faso franc, Cameroon franc, Central African Republic franc, Chad franc, Denmark krone, Equatorial Guinea franc, Gabon franc, Guinea-Bissau franc, Ivory Coast franc, Mali franc, Niger franc, Republic of the Congo franc, Senegal franc and Togo franc.
Australian Dollar (AUD)
- Currency overview: The 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 the USD, EUR, JPY and GBP. The AUD accounts for approximately US$445 billion in turnover per day, representing 6.8% 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. The 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 71.2% of all jobs. The exportation of commodities plays a major role in the economy as Australia ranks 22nd in total exports. Key exports are coal, iron, gold 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, the 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.
- The 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 the GBP and JPY.
This article was last updated on 17th July 2020.
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…