Table of contents:
- 1 20 Australian Pound Bankers
- 1.1 Recent developments
- 1.2 Australian equity market
- 1.3 Trading hours in Australia
- 1.4 Risk-on/Risk-off and the Australian Dollar
- 1.5 Economic situation in Australia
- 1.6 Important trading partners
- 1.7 Mineral resources and raw materials in Australia
- 1.8 Agriculture
- 1.9 Services sector
- 1.10 The Australian Dollar and Trading
- 1.11 Reserve Bank of Australia (RBA)
- 1.12 Australian dollar – currency pairs
- 1.13 The EUR/AUD currency pair
- 1.14 The AUD/USD currency pair
- 1.15 What factors influence the Australian Dollar’s currency trading?
- 1.16 Jobs and unemployment rate
- 1.17 G7 Meeting
- 1.18 To what extent does this now play a role for the individual trader?
- 1.19 CPI Inflation Data
- 1.20 arbitrary price index
- 1.21 OPEC meeting
- 1.22 To what extent does OPEC now play a role in foreign exchange trading?
- 1.23 Development of retail trade
- 1.24 Gross domestic product (GDP)
- 1.25 Conclusion
In the time before the Australian dollar was introduced in 1966, there was the Australian pound. When the new currency was introduced, it was initially linked to the US dollar through the Bretton Wood System. However, this entanglement was already dissolved in 1971.
20 Australian Pound Bankers
The Australian pound – precursor of the Australian dollar
Until the 1970s, not only the Australian dollar, but also the Australian financial market in general was largely under the control of the national government. Between the 1970s and 1980s, this state control was subsequently relaxed. This was not least due to the economic crisis in Australia during this period, which resulted in an increased unemployment rate and inflation.
In this context, the lifting of interest rate controls by the government is noteworthy. In the years that followed, the Australian market was finally opened up to foreign banks and at the end of 1983 the currency could be traded on the currency market for the first time.
From the 1990s onwards, the Australian financial market began to recover and the economy was increasingly placed in a global context. Today, the RBA intervenes on an average of only 5% of all trading days.
In the year 2012, the Australian Dollar then reached a peak (at that time, for 1 Euro, one got the equivalent of only 1.16 Australian Dollar), which was, among other things, due to the economic power China that bought a considerable amount of raw materials in Australia. Another reason for this was the low interest rate policy of the American and European banks.
After the Australian dollar had reached this high point, its exchange rate against the euro weakened somewhat again, which was due in particular to the high interest rate policy for government bonds issued by countries in the euro crisis. At the current time, one Euro yields about 1.61 Australian Dollar.
Australian equity market
Stock trading in Australia is basically represented by the Australian Securities Exchange (ASX), previously known as the Australian Stock Exchange. The headquarters of the exchange is located in Sydney. The main indices are the S&P/ASX 200, the S&P/ASX 50 and the All Ordinaries.
The ASX was established in 1987 after the six exchanges from Australia’s largest cities had joined forces. It was not until some time later in 2006 that the name was changed. The Australian Securities Exchange is one of the 20 largest stock exchanges in the world in terms of market capitalisation.
Trading hours in Australia
Before going into more detail about the trading hours in the Forex market around the Australian Dollar, we will first take a closer look at the trading hours in Australian stock trading.
There are many different trading hours on the ASX Exchange, which can be viewed in detail on the website www.asx.com.au. Trading in the so-called PreMarket takes place between 07:00 and 10:00 in the morning (AEST). During this time frame, the traders prepare their orders for the main trading hours.
The orders can then already be submitted and are then placed in a “queue”. However, only when the main trading starts will these submitted orders be processed one after the other. The normal main trade will then run from 10:00 am until 4:00 pm in the afternoon (AEST). Transferred to German time, the main trade then takes place between 01:00 and 07:00.
In Forex trading, however, the trading hours are different. Basically, trading with the Australian Dollar (AUD) is possible around the clock – except on weekends. As currency trading is decentralised and takes place without exchanges, the market participants trade among themselves and do so largely independently of each other in terms of time. With some brokers (especially ECN brokers), forex trading is also possible on weekends, but the market is not really active during this time, as the institutional market participants are not present.
Trading hours are therefore mainly influenced by the time difference between the time zones in the different countries. Around 10 pm (CET) the Forex market opens in Sydney and around 11 pm (CET) on Friday it closes in New York. A clearer presentation of the different time zones can be seen in the following chart.
The chart already shows that there is a temporary overlap of the opening hours, in which a large number of investors and traders are active. For investors from the Central European time zone, trading is therefore particularly interesting from 1 p.m. onwards, as both the US and European markets are active at this time.
As the trading hours on the Forex market are much more flexible compared to the stock market, there are no opening gaps during the week.
Risk-on/Risk-off and the Australian Dollar
Another special feature of the Australian dollar is that it is a high-yielding currency, which reacts very dependent on the market environment. In this context one also speaks of “risk-on” or “risk-off”. Risk-on is basically a market sentiment in which investors take higher risks when trading and use higher-interest investments. In times of risk-on, there is usually an economic upturn, which is why investors choose to invest in high-yielding asset classes such as the Australian dollar.
As a result, high-yielding currencies like the Australian dollar appreciate in value. As a result, the Australian Dollar is not considered a “safe haven” of investment opportunities, not least because of its economic dependence on China. For example, noticeable price changes can be observed whenever new economic data on China is published.
In recent years, for example, the Australian dollar has repeatedly lost value against the euro in some cases when economic data from China was published, which pointed to a declining growth rate in the country.
Conversely, however, the Australian dollar is benefiting in times of China’s economic boom and a globally stimulated economic situation in general. The dependence on China is due in particular to the export of raw materials. The share of raw materials exported to China is in fact over one third.
In times of risk-off, on the other hand, market sentiment tends to be rather negative, which is why investors are looking for supposedly safe currencies as an investment. These include the Japanese yen (JPY) and the Swiss franc (CHF).
Economic situation in Australia
Australia is one of the nations with the strongest economy ever. The average annual income in “Down Under” is about 71.518 Australian dollars (study conducted by https://www.averagesalarysurvey.com/australia). Australia is characterized by a diverse labor market, low unemployment and a generally high standard of living.
Since the beginning of 1990, Australia’s high economic growth rate has put it at the top of the list of OECD countries. The unemployment rate was around 5.3 percent in 2018 (source: Statista). The high immigration of foreign skilled workers is also decisive for the working world in Australia.
Important trading partners
Among Australia’s largest trading partners are the USA, South Korea, New Zealand, China, Japan, Singapore and Germany. As mentioned earlier, China’s economic power plays a particularly important role in this context, with goods worth over 85 billion dollars being exported there in 2017 (source: OEC).
Mineral resources and raw materials in Australia
These high export sums are made possible above all by the wealth of mineral resources and raw materials. Just under a quarter of Australia’s GDP is ensured by trade in raw materials. Among the most important raw materials are
- Iron Ore
- Natural gas
The value of the coal deposits down under is currently estimated at 1.7 trillion euros, while the value of the oil reserves is estimated at around 258 billion euros. Apart from the classic natural resources, a number of other raw materials also play an important economic role. These include animal husbandry (especially cattle and sheep), with wool and meat as raw materials.
About 2.55% of the people (source: Statista) in Australia are still employed in the primary sector of agriculture, with as much as 80% of the goods produced subsequently being exported.
Large cities such as Sydney and Melbourne play an essential role here. Over 78% of the people in Australia are currently employed in the tertiary sector.
The Australian Dollar and Trading
The next step will be to look more closely at trading with the Australian dollar on the Forex market. As mentioned in the previous chapter, there are a number of currency pairs with the Australian Dollar that are traded in the Forex market. With an approximate trading volume of the equivalent of 174 billion US dollars, the Australian dollar ranks fifth on the list of the most traded currencies worldwide (source: Bank for International Settlements – BIS).
The Australian dollar therefore has a high liquidity, which is also a good prerequisite for successful trading in the Forex market. However, high liquidity is not in itself a guarantee for effective trading in the Forex market.
In order to trade the Australian Dollar profitably, a certain amount of expertise and knowledge of the various factors influencing the Australian currency is required in addition to an appropriate trading strategy. And at this point, it should be immediately predicted that it is not enough to simply deal with certain charts. Instead, a far-sighted view of the Australian dollar and its various influences in general is required.
If we break it down, the Australian dollar is first and foremost influenced by supply and demand. If a large company such as Amazon, for example, wants to convert its profits earned in Australia into US dollars, then this has a correspondingly exchange-rate moving influence – depending on the volume of money moved (even if only in the short term).
Reserve Bank of Australia (RBA)
However, one factor that has a stronger influence on whether the Australian dollar rises or falls is the monetary policy of the national central bank. This in turn is fundamentally influenced by the key interest rate, which is responsible for controlling lending.
The central bank of Australia is the so-called Reserve Bank of Australia (RBA), which was founded in 1960. Its headquarters are located in the metropolis of Sydney. This bank is responsible for regulating the domestic currency and manages the issuance of banknotes and coins. The RBA is also responsible for the management of Australia’s gold reserves and foreign exchange reserves.
The responsibilities of the Central Bank of Australia are relatively diverse. However, the focus of the range of tasks is on the general management of financial market policy. This should be made possible in particular by keeping inflation low. Of course, the Reserve Bank of Australia also has a number of other important tasks. These include the following points:
- Foreign money reserves are to be managed
- Issue of the Australian dollar
- Customary banking tasks for the own government
- Making a contribution to Australia’s economic growth
- Positive impact on the employment rate
- Ensure financial and monetary stability
In the course of these tasks, interest rate policy also plays a decisive role. For this reason, the interest rate policy background and developments will be discussed in more detail in a later chapter.
Australian dollar – currency pairs
The Australian dollar is now traded worldwide in Forex trading with other currencies. The currency is known in the Forex market as the “AUD” and is also one of the major currency pairs, the most traded currency pairs. In particular, the AUD/USD currency pair is very popular among traders. Here is a brief overview of all currency pairs around the Australian dollar.
Due to its very high raw material deposits, Australia is one of the so-called “commodity currency”, i.e. the commodity-currency pairs. The result of the large commodity trade worldwide is an equally high trading volume of the Australian Dollar on the Forex market. Below are some popular currency pairs with the Australian dollar.
Tip: Forex Trading Signals for the Australian Dollar
The EUR/AUD currency pair
Although the trading volume of the EUR/AUD cross currency pair is not quite as large as that of the EUR/USD major, it is nevertheless one of the most important “Euro Crosses” in the global Forex market. As an investor, you can bet on the euro getting stronger against the Australian dollar. In this case, one trades a long position in EUR AUD. On the other hand, if you want to bet on an appreciation of the Australian Dollar against the Euro, a short position is required.
Trading the EUR/AUD currency pair is generally considered risky, which is partly due to the frequent price fluctuations that occur. As a result, the cross currency pair is especially suitable for traders who like to take risks when trading.
The Mini Future Long strategy is very popular with this type of traders, and it is expected that the EUR/AUD price will rise in the long term.
As a beginner in trading, however, the EUR/AUD currency pair should be traded in very tight spreads and at low trading costs if possible. The cross currency pair can be traded during the Sydney Session from 22:00-7:00 GMT or the London Session from 8:00-17:00 GMT.
The AUD/USD currency pair
The AUD/USD currency pair falls into the grouping of Forex Majors, the main currency pairs in global forex trading. As a trader, you can also trade either a long position if you are betting on an appreciation of the Australian dollar or a short position if you believe the US dollar has greater potential.
AUD/USD, with its very high liquidity, is one of the currency pairs with the highest turnover and is particularly popular in options trading.
Aside from the economic data, it is also important to keep an eye on the behavior of the U.S. Federal Reserve and the Bank of Australia when trading the AUD/USD pair. The Central Bank of Australia will be discussed in more detail below.
One of the most popular trading strategies with the AUD/USD currency pair is the so-called carry trade strategy. This strategy often proves to be effective, especially in times of economic growth, and can ensure that long-term profit potential can be realized.
What factors influence the Australian Dollar’s currency trading?
An important role in the Australian monetary system is played by the base rate and other types of interest in general. As mentioned above, interest rates are mainly regulated by the Reserve Bank of Australia (RBA), whose objectives include, in particular, achieving a low and stable rate of inflation. In the context of interest rates in Australia, one also speaks of the Official Cash Rate (OCR), or cash rate target for short.
The OCR can also be influenced by the Reserve Bank of Australia, for example by buying or selling government-issued securities. If there is an increase or decrease in OCR, then this also leads to a change in the interest rates of mortgages and loans, for example.
If you look at the development of Australia’s Official Cash Rate over the past few years, you can see that it has fallen further and further since the 1990s. While the Australian key interest rate reached its high of 14.00% in September 1990, it is currently only around 1.00%.
The data regarding the Australian key interest rate is updated every month and always announced at the end of the month. Below is a graph showing the development of the Cash Target Rate from 1990 to the current point in time. The chart was created by www.ceicdata.com and published by the Reserve Bank of Australia.
In this context, it is also useful to take a look at the loans in down under. On the one hand, there is the interest rate for short-term loans to consider. At 1.20% (June 2019), it is currently at a very low level (for comparison: in 1974, the percentage here was a full 21.75%).
For traders, the level of short-term interest rates is one of the most important factors in currency valuation – most other indicators are only included to predict how interest rates will change in the future.
Similarly, the interest rate on long term loans has also been similar. While it was 16.50% in 1982, it will be only 1.38% in June 2019.
Jobs and unemployment rate
In the chapter on Australia’s economic situation, the issue of unemployment in the “fifth continent” has already been briefly touched on. The unemployment rate in particular also plays a major role in determining the direction in which prices on the Forex market are developing.
However, the creation of new jobs on the other side should not be ignored either. Because about the extent of the creation of jobs one receives important signals about the consumer spending of consumers, which again exerts a corresponding influence on the whole economy.
The unemployment rate in Australia has remained relatively constant in recent years and has generally fluctuated between 5 and 6 percent. By comparison, the rate in Germany was around 3.4% in 2018, and 3.8% in the American states. With this rate, Australia is nevertheless high up in the list in an international comparison, which therefore has a correspondingly positive effect on the currency.
At this point one more thing should be mentioned: Although the number of unemployed is generally regarded as a lagging indicator, it is nevertheless an important signal for overall economic health, as consumer spending correlates strongly with labour market conditions. Therefore, this does not necessarily always have to be a negative indicator in trading.
Another influencing factor, which is also interesting for traders, are the meetings and results of the G7 (“Group of Seven”). The G7 is an informal gathering of the formerly economically strongest nations of the West. The heads of state of the respective countries met at regular intervals to discuss specific problems and challenges of the global economy. The following nations come together at this summit: Canada, France, Germany, Italy, Japan, England and the United States.
The G7 is characterised by economic strength in a global comparison. Added together, the member states account for only 10.5 percent of the world’s population, and 67 percent of global gross national income is generated by them.
After the international association, founded in 1975, initially included Russia in 1998, the country was finally excluded again in March 2014 due to the annexation of Crimea by the former Eastern Bloc state.
To what extent does this now play a role for the individual trader?
Well, even though the G7 is not an official institution, it is an influential political body at the highest level and its initiatives and strategies can have a significant impact on the currency markets.
CPI Inflation Data
In connection with the inflation rate, the so-called CPI (Consumer price index) also plays a decisive role.
The CPI is used to determine the increase or decrease of certain prices. The CPI measures the extent to which the prices of a basket of goods have developed over a certain period of time.
The “basket of goods” includes all the consumer goods in people’s everyday lives, such as food, clothing, rent, but also cars and certain services. On the basis of the information obtained from this, the next step is to draw conclusions about the development of inflation or even deflation.
To what extent is this relevant for the trading scene? Well, consumer prices have a major influence on overall inflation. And the inflation trend is essential for the valuation of foreign exchange, because a rise in consumer prices leads to central banks raising interest rates to counteract this. The role of interest rates for traders is already known.
So what is the Consumer price index in Australia? Basically, the CPI has been rising steadily over the last few years, as you can see from the chart below.
If, on the other hand, we look at the development of the inflation rate over the last 10 years, we see that it has risen by an average of between 1 and 3 percent per year. A short diagram is also provided to facilitate the overview.
arbitrary price index
The so-called Wage Price Index is another factor that influences the Forex trade. The WPI measures the change in normal hourly rates. The number of hours worked or the composition of the workforce is not taken into account, only the hourly rates without bonuses. The WPI is remeasured each quarter and the data is then published by the Australian Bureau of Statistics.
It is therefore also a measure of inflation. When business costs rise, this is usually passed on to the individual consumer.
Considering the impact of wage developments on household income and expenditure and, consequently, on the development of the economic situation in general (in Australia, household consumption accounts for almost 60% of GDP), the WPI is one of the most important indicators. Both the CPI and the WPI therefore have an enormous influence on people’s consumption behaviour and thus on the entire economy.
If wage levels remain at low levels for a prolonged period of time, this increases the downside risks to inflation and thus the pressure on the RBA to cut the Australian key interest rate again.
The businessinsider.com.au chart below shows how the WPI has developed in the past.
The next factor to be mentioned at this point is OPEC. OPEC stands for Organization of the Petroleum Exporting Countries and is a global organization with headquarters in Vienna, which was founded in 1960. At present, OPEC consists of the following nations:
- Equatorial Guinea
- Republic of the Congo
- Saudi Arabia
- United Arab Emirates
Iran, Kuwait, Saudi Arabia and Venezuela are among the countries that produce the most oil worldwide. All members of the Organization of the Petroleum Exporting Countries together currently supply about 40 percent of the global production of crude oil, with more than 75 percent of global oil reserves.
The OPEC meetings usually take place in Vienna. There the member states discuss a number of issues relating to the energy markets and, above all, agree on how much oil they will produce in the future. While the meetings are usually closed to the press, however, those attending usually speak to reporters. At the end of each meeting, a formal statement of policy changes and the objectives of the meetings is published.
The main objective of the meeting is basically to control oil prices at international level. The oil policy of all member countries should therefore be managed and harmonised accordingly. On the other hand, the individual and common interests of these countries should also be protected.
This goal is to be achieved by a controlled shortage or increase in the production of oil reserves worldwide. This is intended to reduce, consolidate or increase the price of oil so that it is within a certain target price corridor.
To what extent does OPEC now play a role in foreign exchange trading?
As mentioned earlier, OPEC represents around 40% of the world’s oil supply and is unified in the production of oil. With such a high degree of control over oil supply, shifts in production can have a significant impact on oil price movements. And oil prices in turn have a major impact on the economic well-being of a country.
Development of retail trade
At this point, the aspect of retail trade will be briefly discussed. In particular, the change in the total turnover recorded in the retail trade. This can also provide important indicators and clues for future developments on the Forex market. As a trader, one of the first things you should always look at is the development of the retail market.
Statistics on this data are also collected every month by the Australian Bureau of Statistics and published on the website. In Australia, this is referred to as “retail sales”. The retail sales statistics collected can be used to measure consumer spending, which is known to make up a large part of the economy. A statistic provided by the ABS shows the change in consumer behaviour in recent years (“Australia Consumer Spending”). This will be presented below.
Gross domestic product (GDP)
Of course, the gross domestic product (GDP) also plays a major role when it comes to assessing the economic strength of a nation. It is THE most important measure for the state of an economy and should therefore always be used by traders. According to the definition of the Federal Agency for Civic Education, GDP describes the “value of all goods and services that are generated within the national borders of an economy in one year.
In the English language this value is called “Gross domestic product” or GDP. The following chart provides an overview of GDP development over the past decade.
Even though the Australian dollar has no centuries of history, it is still an interesting currency and is not without reason one of the major currencies or majors in the Forex market. The enormous variety of raw materials enables the country to export large quantities profitably and worldwide.
After the economy of Down Under has been steadily growing for the last quarter-century, it will be clear to investors and traders what the future holds for the nation itself and the Australian dollar.
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