Currency Profile: Australian Dollar (AUD)
The Australian dollar is the currency of Austria (officially Commonwealth of Australia) and its certain territories of Christmas Island, Cocos (Keeling) Islands, Norfolk Island. Austria also has other four external territories of Ashmore and Cartier Islands, Coral Sea Islands, Heard Island and McDonald Islands, Australian Antarctic Territory which are generally uninhabited islands. The Australian dollar is also used by three independent Pacific Island states of Kiribati, Nauru and Tuvalu.
- Australia has a mixed economy, which relies on the service industry contributing to almost 63 percent of the total gross domestic product (GDP).
- In 2020, Australia ranked as the 13th largest national economy by nominal GDP, with the country’s GDP being estimated at almost USD1.4 trillion.
- With Australia’s natural resources valued at USD19.9 trillion in 2019, Australia is the 10th richest country in the world in terms of natural resources. These resources include metals, coal, diamonds, meat and wool, which account for the main products of the country’s export.
- The country is also known for having the largest gold reserves globally, supplying over 14 percent of the world’s gold demand and 46 percent of the world’s uranium demand.
- Australia imports products such as computers, machines, telecommunication parts, equipment, petroleum products and crude oil.
- The popularity of AUD among traders is due to numerous factors related to geology, geography, and government policy.
- The AUD/USD currency pair is one of the most frequently traded pairs globally.
- AUD exchange rates are tied to demand for Australia’s natural resources from Asian countries, especially China and India. Therefore, the Australian dollar is also known as a commodity currency.
- In 2020, the Reserve Bank of Australia increased the cash in circulation from A$83 billion to A$94 billion due to increased demand for notes.
- The Australian Securities Exchange in Sydney is the 16th largest stock exchange globally, in terms of domestic market capitalisation.
Important Characteristics of the Australian Dollar
Commodity linked currency. Historically, the Australian dollar has had a very strongly correlation (approximately 80%) with commodity prices and, more specifically, gold and iron ore prices. The correlation stems from the fact that Australia is the world’s second largest gold producer and the world’s largest producer of iron ore. Therefore, the price of iron ore and gold is extremely important to Australia’s economy. However, unless there is a sharp movement in gold or iron ore prices, it generally takes time for the AUDUSD to adjust to changes in the price of commodities. Generally speaking, if commodity prices are strong, inflationary fears start to appear, and the RBA would be inclined to raise rates to curb inflation. However, this is a sensitive topic, as gold prices tend to increase in times of global economic or political uncertainty. If the RBA increases rates during those conditions, it leaves Australia more vulnerable to spillover effects.
Carry trade effects. Australia has one of highest interest rates among the developed countries. With a fairly liquid currency, the Australian dollar is one of the most popular currencies to use for carry trades. A carry trade involves buying or lending a currency with a high interest rate and selling or borrowing a currency with a low interest rate.
Drought effects. Since the majority of Australia’s exports are commodities, the country’s GDP is highly sensitive to severe weather conditions that may damage the country’s farming activities.
Interest rate differentials. Interest rate differentials between the cash rates of Australia and the short-term interest rate yields of other industrialized countries should also be closely watched by Australian dollar traders. These differentials can be good indicators of potential money flows as they indicate how much premium yield Australian dollar short-term fixed-income assets are offering over foreign short-term fixed-income assets, or vice versa. This differential provides traders with indications of potential currency movements, as investors are always looking for assets with the highest yields. This is particularly important to carry traders who enter and exit their positions based on the positive interest rate differentials between global fixed-income assets.
Important Economic Indicators for Australia
GDP GDP is a measure of the total production and consumption of goods and services in Australia. GDP is measured by adding expenditures by households, businesses, government, and net foreign purchases. The GDP price deflator is used to convert output measured at current prices into constant-dollar GDP. The data are used to gauge where in the business cycle Australia finds itself. Fast growth often is perceived as inflationary, while low (or negative) growth generally coincides with a weak growth period.
CPI The Consumer Price Index (CPI) measures quarterly changes in the price of a basket of goods and services, which account for a high proportion of expenditure by the CPI population group (i.e., metropolitan households). This basket covers a wide range of goods and services, including food, housing, education, transportation, and health. This is an important indicator to watch, as it is a key input for monetary policy decisions.
Balance of Goods and Services This number is a monthly measure of Australia’s international trade in goods and services on a balance of payments basis. General merchandise imports and exports are derived mainly from international trade statistics, which are based on Australian Customs Service records. The current account is the balance of trade plus services.
This is a national accounts measure that reflects current expenditure by households and producers of private nonprofit services to households. It includes purchases of durable as well as nondurable goods. However, it excludes expenditure by persons on the purchase of dwellings and expenditure of a capital nature by unincorporated enterprises. This number is important to watch, as private consumption or consumer consumption is the foundation for resilience in the Australian economy.
Producer Price Index
The Producer Price Index (PPI) is a family of indexes that measures average changes in selling prices received by domestic producers for their output. The PPI tracks changes in prices for nearly every goods-producing industry in the domestic economy, including agriculture, electricity and natural gas, forestry, fisheries, manufacturing, and mining. Foreign exchange markets tend to focus on seasonally adjusted finished goods PPI and how the index has reacted on an m/m, q/q, h/h and y/y basis. Australia’s PPI data are released on a quarterly basis.
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