Australian Dollar: What you should know
The Australian dollar (AUD), or “Aussie” as some traders call it, is one of the strongest currencies in the Asia-Pacific region. The Australian dollar is among the top currencies traded in global markets accounting for approximately 6.0% of daily turnover, worth an average value of $479 billion.
The Reserve Bank of Australia (RBA) in its “Driver of the Australian Dollar Exchange Rate” notes: “Commodities account for a large share of Australia’s exports and so movements in commodity prices result in movements in export prices. Higher commodity export prices mean more Australian dollars are required to purchase the same amount of Australia’s commodity exports. This is associated with an increase in demand for Australian dollars and an appreciation. Indeed, the Australian dollar is often referred to as a commodity currency.”
This blog will give you some useful insights regarding the Australian dollar, the country’s economy and the RBA’s monetary policy.
Australian Dollar fluctuations
The Australian dollar collapsed against its US counterpart in March 2020 to its lowest level since 2003, making a low of $0.5510 on March 19th. A report by the National Australian Bank (NAB), published in April 2020, noted that “augmenting downward pressure on the AUD/USD was the fall in commodity prices not just because of the demand shock from the unfolding global economic contraction but the collapse in oil prices from positive supply shocks.”
The Australian dollar rallied against the US dollar reaching a 3-year high on May 1st 2021, but lost ground in the next months, hitting a 2-year low in October 2022.
This year, the Australian dollar has lagged most of its Group-of-10 peers, losing 2.5% versus the US dollar. A Bloomberg report suggested that the drop “has come against a backdrop of US banking turmoil, falling Treasury yields and the Reserve Bank of Australia’s decision to pause its rate hikes to assess the outlook.”
What should you know about the Australian economy?
According to data provided by the World Bank, the Australian economy is the 13th largest in the world in terms of nominal gross domestic product (GDP). A survey conducted by the Organisation for Economic Co-Operation and Development (OECD) noted that Australia’s government debt stood at 83.7% of the national GDP.
The International Monetary Fund’s (IMF) latest World Economic Outlook forecasts the Australian GDP to expand by 1.6% in 2023 and 1.7% in 2024; it should be noted that the Australian economy grew by 3.7% in 2022. Australia’s Treasury and the Reserve Bank of Australia (RBA) forecast a 1.5% GDP growth rate for 2023 and 2024.
The same IMF report said that inflation would come in at 5.3% in 2023 and slide to 3.2% in 2024. RBA’s analysts forecast inflation to reach 4.75% this year and 3.5% in 2024.
Australia’s Treasurer Jim Chalmers told ABC reporters that “the situation in the world has become more complex and more challenging even over the course of the last few months. And so, we won’t be completely immune from that. The Treasury does expect our own economy to slow considerably later this year. Because of that combination of a slowing global economy and the impact of higher interest rates here at home as well. So, we’ve got a lot coming at us from around the world.”
RBA to evaluate the effects of its monetary policy
On April 4th, the RBA’s governing board announced its decision to pause its monetary policy tightening plans. The post-meeting statement said that the full effect of the substantial increase in interest rates has not been felt yet. The RBA’s board members highlighted that consumer inflation seems to have peaked but added “that some further tightening may well be needed to ensure that inflation returns to target.”
In a report, currency strategists at Westpac wrote: “As Australian markets reopened after Easter, pricing for the RBA to raise the cash rate 25bp in May was about 25-30%. A May hike remains Westpac’s baseline scenario ahead of the vital Q1 CPI data on 26 April. After May, market pricing starts to lean towards the chance of easing.”
The RBA’s Governor Philip Lowe told The National Press Club: "A third one is that the Reserve Bank Board is prepared to have a slightly slower return of inflation to target than some other central banks. Our last set of forecasts have inflation returning to target by mid-25."
Australian dollar trading and risk mitigation
The Australian dollar currency pairs such as AUD/USD, AUD/GBP or even AUD/NZD are frequent financial news articles topics. In the world of trading, the Australian dollar is a currency that draws attention as it is closely related to commodity trading, and due to the correlation of the country’s economy with China.
As with every trading instrument, risk management is crucial for every trader, especially beginners. As a beginner trader, you may be exposed to dangers such as losing funds as you will likely lack the experience to judge which would be the right course of action. In order to improve your trading skills and your chances for success, it would be best to learn how to use risk management tools. Using tools such as stop/loss order, for example, help you minimise risks when trading. As a result, there is less stress for you and a clear mind to adjust a trading strategy the way you want to.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.