Officially known as the Commonwealth of Australia, Australia could be found somewhere in the Southern Hemisphere, just southeast of Asia.
Considered as the world’s biggest island, Australia is the only country on earth that governs an entire continent!
Before the coming of settlers from Europe in 1788, Aboriginal people inhabited most of the country.
Since then, people from all over the world have migrated to Australia, which has made it one of the most culturally diverse countries in the world. Now, Australia is home to people from 200 different countries.
Lastly, and probably most importantly, Australia is known for producing the meanest and most hardcore actors of all time like Mel Gibson, the Braveheart; Hugh Jackman, the Wolverine; and the legendary Heath Ledger, the Joker!
To add to that, they also have mech-kangaroos, battle tank armadillos, and bomber pelicans. You can see how the rest of the world really had no choice but to name an entire continent after them.
Australia: Facts, Figures, and Features
- Neighbors: New Zealand, Papua New Guinea, Indonesia
- Size: 2,969,907 square miles
- Density: 7.3 people per square mile
- Capital City: Canberra (population 358,222)
- Head of State: Queen Elizabeth II
- Head of Government: Prime Minister Julia Gillard
- Currency: Australia dollar (AUD)
- Main Imports: Machinery and transportation, electrical and telecommunications equipment; crude oil and petroleum products
- Main Exports: Ores and metals; wool, food and live animals; fuels, transport machinery and equipment, Hugh Jackman, Nicole Kidman, Heath Ledger
- Import Partners: China 19.2%, U.S. 12.1%, Japan 7.8%, Singapore 5.3%, Germany 5.1%
- Export Partners: China 26.4%, Japan 19.1%, South Korea 9.2%, India 6.4%, Taiwan 3.7%
- Time Zone: GMT +10
- Website: http://www.australia.gov.au
Compared to G7 nations, Australia’s overall economy is relatively small. According to the World Bank, however, on a per person basis, its GDP is even higher than the U.K., Germany and even the U.S.!
In the past fifteen years or so, Australia’s economy has grown an average of 3.6% annually, well above the 2.5% world norm. No wonder it ranked third overall in the Legatum Institute’s 2011 Prosperity Index!
Australia’s economy is highly service oriented, with over 70% of its GDP coming from industries such as finance, education, and tourism.
Despite having a very robust export industry and stellar growth, Australia has been notoriously famous for consistently having a high current account deficit. This means that Australia is using up more resources from other economies to satisfy its own domestic consumption.
Monetary & Fiscal Policy
The Reserve Bank of Australia (RBA) is the main governing body of Australia when it comes to monetary and fiscal policy. The RBA’s aim is three-fold:
- Keep exchange rates stable
- Ensure growth
- Maintain full employment
In order to do this, the bank believes that the country’s annual inflation rate must be kept within 2-3%. By keeping a tight rein on inflation, the value of their domestic currency is secured, which will eventually lead to sustainable economic growth.
How does the RBA make sure inflation is controlled? Two ways: adjusting the cash rate and conducting open market operations.
The cash rate is the interest rate charged by lending banks on overnight loans to other financial institutions.
Open market operations, on the other hand, is the way the RBA controls money supply through the buying and selling of government loans or other financial assets. With the exception of January, the RBA meets monthly to discuss what changes it will make to monetary policy.
To make this easier to swallow, take this simple example. Let’s say that inflation in Australia is increasing much faster than what the bank wants. In order to suppress the high inflation rate, the bank decides to raise the cash rate, which will effectively increase the cost of borrowing by…. uh, borrowers.
Naturally, this move will tone down lending, lessening the overall money in circulation. And basic supply and demand tells us that the scarcer something is, the more valuable it is!
Getting to Know the AUD
Even though they’ve got their seasons mixed up, the Australians are always up bright and early to play. Well, this is mostly because the Australian market is the first to open every week! Just like the people inhabiting the place, Australia’s local currency, the AUD, is called the Aussie.
I’m called a commodity dollar for a reason…
One important characteristic of the AUD is that it has a high positive correlation with gold prices. The reason behind this is that Australia is the third biggest gold-digger… errr, gold producer in the world. As a result, whenever the price of gold rises or falls, the AUD goes along for the ride.
… and I’m one of the best candidates for carry trade.
Among the major currencies, the AUD has been known for having the a high interest rate. This makes it a favorite for carry trade. Carry trade is the practice of buying a currency with a high interest rate in exchange for a currency with a lower interest rate.
I’m only awake a couple of hours a day…
Most of the AUD’s movement happens during the Asian trading session, the time when economic data from Australia is released.
… but bad weather is one of my worst enemies!
Given the commodity based economy of Australia, unfavorable weather conditions tend to put a serious strain on Australia’s growth, which leads to a sell-off in the AUD.
How severely do weather conditions affect the AUD?
Well, let’s just say that during the Australian drought of 2002, AUD/USD fell to .4770 – that is almost half its current exchange rate!
Important Economic Indicators for Australia
Consumer Price Index – Because the RBA’s primary goal is controlling inflation, the CPI, which measures the overall change in price of consumer goods and services, is closely watched by the bank.
Balance of Trade – Australia has an extremely robust trade sector so currency traders and bank officials alike tend to watch changes in the country’s export and import levels.
Gross Domestic Product – This measures how well Australia’s economy is doing. Positive readings indicate economic growth while negative readings mean economic contraction.
Unemployment Rate – The unemployment rate tracks how many people in Australia’s labor force are out of work. The number of people employed, or rather, unemployed in this cause, has a high correlation with economic activity. A person without a job means he has less money available for spending.
What Moves the AUD
Economic and Interest Rate Outlook
The AUD is greatly affected by macroeconomic factors such as monetary policy rhetoric, interest rates and domestic economic data.
In trading the AUD, always pay special attention to the interest rate outlook. Comments made by officials from the RBA regarding interest rates, for instance, could create a hefty impact on the AUD.
For the better part of the last decade, China has been on a roll, posting some massive growth figures. In order to create finished goods, China sources a lot of its raw materials like coal and iron ore, from Australia.
For China to buy raw materials from Australia, it must first need to exchange its local currency for the AUD. This means that increased demand for Chinese goods tend to prop up the AUD’s value.
Likewise, a decline in demand for Chinese products could lead to a fall in the AUD’s value.
New Zealand Data
To a lesser extent, data from New Zealand influences the AUD’s price action. Take note that New Zealand’s economy is very similar to Australia, which makes their currency positively correlated.
In fact, the relationship of the two countries is sometimes described as “Trans-Tasman” to show how closely tied their economies are and to indicate the existence of the Tasman Sea sitting right between them.
With that said, it is important to be aware of important upcoming data from New Zealand as it could indirectly cause the AUD to move.
AUD/USD is traded in amounts denominated in AUD. Standard lot sizes are 100,000 AUD and mini lot sizes are 10,000 AUD.
The pip value, which is denominated in U.S. dollars, is calculated by dividing 1 pip of AUD/USD (that’s 0.0001) by the AUD/USD’s current rate.
Profit and loss are denominated in U.S. dollars. For one standard lot position size, each pip movement is worth 10 USD. For one mini lot position size, each pip movement is worth 1 USD.
Margin calculations are based in U.S. dollars. For example, if the current AUD/USD rate is 0.9000 and the leverage is 100:1, 900 USD is needed in available margin to be able to trade on standard lot of 100,000 AUD. However, as AUD/USD rises, a larger available margin in USD is required. Conversely, the lower AUD/USD rate is, the less required available margin is needed.
AUD/USD Trading Tactics
Since the AUD is one of the best candidates for carry trade, which is the buying of a currency with high interest rates and the selling of a currency with low interest rates, AUD/USD is highly affected by crosses.
How can you use this to your advantage?
Well, if you see a break of a significant technical support level in AUD/JPY, that could be a good sign to sell AUD/USD!
Another thing to consider when trading AUDUSD is data coming out from New Zealand. Because of Australia’s nearness and trade relations with New Zealand, positive economic data from New Zealand usually helps push the AUD’s value up.
This means that better-than-expected New Zealand economic reports could be seen as a good signal to buy the AUD. Conversely, poor economic data from New Zealand could be a reason to sell the AUD.
Lastly, take some time to look at how commodity-prices, especially gold are doing. More often than not, the price of gold leads the AUD.
This means that whenever the gold rises in value, AUD/USD could rally soon after! Of course, when the value of gold falls, the AUD also tends follows suit.
Before you start trading the Aussie, better read up on Australian economic news first. Even better, read up on Pip Diddy’s Australian economic roundup in our forums!