We’re always hearing about how the Australian dollar compares to the US dollar, and its value is vital to many in the business world. But how many of us actually know what drives the Aussie dollar? Forex expert Andrew Barnett explains.
The vast majority of currency traders that don’t make money know the least about what actually makes currencies move. Can you believe that?
Trading isn’t all about Technical Chart Analysis. It’s important to understand what makes currencies move… and to do this you need to understand the fundamentals.
So what drives the Australian Dollar (AUD)?
Knowing the fundamentals and flavour of the day is critical when trading the Aussie dollar. An example of a basic fundamental for the AUD that helps drive its price is base metal prices. An example of market sentiment could be what the Reserve Bank Governor said at the Canberra Press Club about his concern about inflation. One is fact and the other is what traders will use to speculate on.
The Australian dollar is a world growth currency. What I mean by that is that because the Australian economy is underpinned by the resource sector and the government relies so heavily on taxes it collects from the mining sector, the AUD is closely linked to world growth and base metal prices.
There are essentially nine major key fundamentals that drive the AUD, but there are three that you need to master, because there are direct correlations to knowing these and knowing what potentially the AUD is going to do:
- Gross Domestic Product (GDP)
- Manufacturing data (PMI)
- Interest rates
- Unemployment
- National Debt
- Retail Spending
- Commodity Prices
- World Share Markets
- Unexpected News
The first key fundamental is base metal prices such as copper. When base metals prices are rising usually the AUD is following. You can view the live price of copper on any decent broker platform.
You should also be able to see the live real time prices of the following Stock Market Indexes. UK100, Dow Jones, S&P 500, CAC 40, DAX and the Australia Share Price Index. From the 960 listed companies on the Australian Stock Exchange 46 percent of them are mining companies. So what they are doing on any given day is important.
The second key fundamental you need to know about the AUD is its correlation to World Share Markets. When share markets are going up that means we have what is called ‘Risk On’. Traders are taking money out of cash, gold and things such as bonds and entering equities, commodities and currencies that are considered to be more ‘Risk On’ investments. The AUD is considered to be one of those ‘Risk On’ currencies by world markets and when you see the Dow Jones Index move higher over 100 points you will usually see the AUD also moving higher.
The third key fundamental to know when trading the AUD is inflation and when the Reserve Bank of Australia is likely to put interest rates up or down. To keep things really simple, when interest rates go up in Australia the AUD will usually also go up and vice versa on the way down.
When the Reserve Bank is putting interest rates up that means they are trying to slow down the growth of the Australian economy which means growth is strong and the economy is generally doing well. The AUD will usually rally on this good news.
When the Reserve Bank is putting interest rates down this means the opposite. Growth is slowing, inflation is coming down and they need to stimulate the economy and get people spending. If you know when the Reserve Bank is likely to drop rates it can be an extremely profitable opportunity, especially if you know how to combine the charts along with the news. That’s worth a fortune.
Currently the Reserve Bank of Australia has a target inflation rate of 2 percent to 3 percent. This essentially means that if rates come down inside this target band they will likely lower interest rates. There is an Inflation number that is released every month and if you see the Inflation rate at 4 percent and then all of a sudden it is under 3 percent then you can expect to usually see the RBA lower rates the next month.
This sort of key information is where the professional trader always beats the amateur trader to the money. The amateur trader is waiting for the Reserve Bank Interest rate announcement, the professional trader is watching the Inflation announcement two weeks prior and is also looking at overall unemployment and retail spending and gathering information from news sources and is usually out of the market when you may be about to enter.
– Andrew Barnett is a professional trader and co-founder of LTG GoldRock
