The Opportunities to Watch when Trading AUD/USD

The Australian dollar (AUD) had entered 2023 on a high note, rising to US$0.71 in January. However, it steadily declined throughout the year, ending 2023 at US$0.65. We’re almost halfway through 2024 and the situation hasn’t changed much. The AUD was trading at US$0.66 in mid-May. KPMG forecasts that the Aussie would end 2024 at $0.69 and 2025 at $0.71, on the back of projected economic growth in Australia, which is likely to accelerate from 1.4% in June 2024 to 2.3% by December 2024.

At the same time, the AUD/USD tends to witness high volatility, which creates abundant opportunities for traders to optimize their gains in the forex markets. Here’s a look at the news and market updates forex traders keep an eye out while trading the AUD/USD.

Interest Rate Differential Between the Two Countries

Interest rates determine the demand for a currency. High demand (amid high rates) exerts upward pressure on the currency valuation, while poor demand exerts downward pressure.

The Australian central bank, the Reserve Bank of Australia (RBA), usually follows the US Federal Reserve (Fed) for its monetary policies. However, an increasing contrast between the two economies may push the RBA to lower interest rates earlier than the Fed. As of May 13, 2024, the US economy is “booming,” according to Jamie Dimon, Chief Executive at JP Morgan, while Australian growth is subdued and expected to hit a low of 1.4% by June 2024. The below-trend growth and sustained decline in inflation levels may translate into earlier rate cuts by the RBA.

Sustained inflation and strong job growth in the US are constantly forcing the Fed to postpone interest rate cuts. As of mid-May 2024, the Fed’s key rate stood at around 5.37%, while that of RBA was 4.35%. If the RBA pulls back on rates earlier than the Fed, the increased interest rate differential might exert downward pressure on the Aussie. According to Barrenjoey’s Chief Rate Strategist, Andrew Lilley, the Federal Reserve’s interest rate policy will no longer remain “an impediment” if growth decelerates. 

But There’s a Catch

Warren Hogan, Chief Economic Adviser at Judo Bank, the most accurate forecaster of interest rates in 2023, says that Australia raised its interest rates later and significantly less than its peers. Therefore, it will be the last to pivot interest rate policies. Additionally, if US inflation accelerates, banks may delay interest rate cuts worldwide.

Such conflicting speculations urge forex traders to monitor both banks’ interest rate policies to make informed trading decisions.

What to Watch: 

• Monetary Policy – The Reserve Bank of Australia (RBA) announces its monetary policy every other month, while the US Federal Reserve (Fed) declares its monetary policy eight times a year. Look out for these announcements. Any interest rate reduction by the RBA adversely impacts AUD/USD, while the Fed’s rate cut boosts the currency pair. 
• Inflation Rate – Inflation rate not only has a direct impact on a currency, but also indirectly via its influence on the central bank’s monetary policy. The CPI (consumer price inflation) is the most widely watched, while the PPI (producer price inflation) is also important.

Trade Relations

International trade relations have had an impact on the Australian dollar for long, given that it is largely an export-based economy. Since Australia exports large amounts of iron ore, natural gas, and agricultural products, the country’s exports have a huge impact on the AUD. This is because when the cost of these commodities increases, more Australian dollars are needed to purchase them. Hence, the demand for the currency increases.

Enhanced commodity demand in the global markets attracts foreign investment in the country, which also helps the AUD appreciate. For instance, from the mid-2000s to the mid-2010s, the Australian resources sector expanded significantly with the help of foreign investments. Higher terms of trade and a mining boom raised the demand for workers and higher wages. This propelled the economy and the currency. Consequently, the AUD hit a record high of $1.10 in 2011.

Australian commodity earnings for 2024-2025 are forecasted to decline below $400 billion to about $348 billion due to weakened global demand and improving global supply chains. This may exert pressure on the currency.

What to Watch

• Balance of Trade – A trade surplus will impact the Australian dollar much more than it will for the US, since the former exports a variety of agricultural and mining products. This is also the reason why fluctuations in commodity prices also impacts the AUD/USD.
• GDP Growth – Although this is a lagging data release, it is considered the most important indicator of an economy’s health. GDP growth data is released every quarter. Australia’s GDP growth slowed from 4.3% in 2022 to 2.05% in 2023. It is projected to increase, albeit gradually, through 2024 and 2025. 

Market Sentiment

Market sentiment plays a pivotal role in the forex markets. Bullish sentiment pushes currency valuations higher, while bearish sentiment weighs on it. Business leaders across Australia have higher confidence in the global (69%) and domestic (68%) economies than American business leaders or those in the UK. In fact, 54% of Australian business leaders plan to expand into new channels, while 53% are into new geographical regions, indicating a positive economic outlook.

A positive outlook for the economy draws foreign investments and drives the demand for the currency. Positive market sentiment provides tailwinds for the currency value against the US dollar. To gain access to real-time market sentiments, choose a brokerage that offers powerful tools to monitor sentiment data from social media chatter, the markets, and industrial news.

What to Watch

• Consumer Sentiment – This indicates consumer confidence in economic activity and impacts consumer spending. 
• Business Confidence – This is indicative of future developments by companies. 

Australia’s consumer sentiment and business confidence remained below the long-term average in the first quarter of 2024.

How to Trade the AUD/USD Amid Mixed Speculations

While trading any forex pair requires extensive due diligence and technical analysis, choosing the right instrument is crucial for satisfying trading experiences. For instance, derivative instruments, such as contracts for difference (CFDs), are a great way to take advantage of the forex market, since they allow speculation on both rising and falling prices. CFD trading also enables traders to hedge their long positions with short ones, and vice versa. Additionally, CFDs are traded with leverage to lower the entry barrier and allow traders to amplify their market exposure. However, forex traders must employ stop loss, take profit, and other risk management techniques, necessary to mitigate the risks associated with higher market exposure. 

To Sum Up

• The AUD/USD is a popular trading pair, forecasted to exhibit significant volatility through 2024 and 2025.
• Traders must monitor the interest rate policies of the Fed and the RBA to gauge the interest rate differential between the currencies.
• International trade is a key driver of the Australian economy and currency demand.
• Traders must consider market sentiment to make informed AUD/USD trading decisions.
• In volatile markets, CFD trading allows traders to speculate in both directions, multiplying the available opportunities.

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