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Trading ’The Aussie’ - AUDUSD

By , Forex Trading Instructor
15 May 2012 03:00 GMT

Trading the ‘Aussie’ – AUDUSD

In this article, we are taking a closer look at Australian Dollar/US Dollar currency pair. After we examine how ‘The Aussie’ made its way to current price levels, we’ll provide a framework for trading it.

The Australian Dollar, commonly called ‘The Aussie’ is the national currency for the country and continent of Australia, and one of the favorite vehicles of traders around the globe.

Trading_the_Aussie_js_body_Picture_1.png, Trading 'The Aussie' - AUDUSD

A$100 Note known colloquially in Australia as ‘Jolly Green Giant’

In 2012, AUDUSD became the 3rd most popular currency pair in the world, jumping up 2 places from only 2 years before. High interest rates from Australia coupling very strong long-term growth, a robust trading relationship with China and large deposits and exports of natural resources combine to make this a favored asset amongst traders.

One needs only to look at the trend put in by the pair over the past decade to see why:

Trading_the_Aussie_js_body_Picture_4.png, Trading 'The Aussie' - AUDUSD

Created with Marketscope/Trading Station

Since 2001 The Aussie has enjoyed a rigorous up-trend that saw its only major test during the 2008 Financial Collapse. Outside of that period, there was most definitely a one-sided bias in the currency pair. Something interesting is happening of late, as the up-trend appears to be congesting, but we’ll get in the last section of the article for ‘Trading the Aussie.’

Why Did the Aussie Trend so Hard for so Long?

A number of factors contributed to the gains in Australia, key of which were:

  1. High Interest Rates set by the RBA to moderate the inflation that was created from strong growth
  2. Strong growth brought upon by heavy natural resource and commodity deposits that were being mined, and exported from Australia
  3. Increasing commodity prices brought upon by even stronger growth from China and India; both of which are key trading partners of Australia
  4. The aforementioned stronger growth rates being seen in China and Australia only increased the demand for the commodities that Australia was mining and exporting

The economy of Australia had a fairly bullish cycle of events working in its favor, and these are just some of the reasons that traders flocked to the Aussie.

The fact that the RBA is one of the few large Central Banks that hasn’t embarked on some form of government intervention in the past 10 years also helps attract FX traders. Intervention efforts can amount to a financial sucker-punch for traders; unexpectedly reversing strong trends with (or maybe even without) announcements out of the blue.

Australia is one of the few large economies to retain the highest AAA Debt rating, speaking to the political and economic stability that's been seen in the country and yet another contributing factor to the currency’s rising popularity amongst traders.

Trading the Aussie

Because of the high interest rate differential between Australia and the United States, the Aussie-dollar remains a favorite of traders seeking volatility.

During bullish market environments, the AUDUSD can run up faster than many pairs due to its interest rate differential.

During bearish market environments, AUDUSD can fall much faster than many pairs due to its interest rate differential.

In many ways, the Aussie-dollar can offer characteristics similar to high-beta stocks, in which market movements are exaggerated by additional volatility.

Due to the volatile nature of the currency pair, breakout strategies may work best during trending markets. With breakout strategies, traders are monitoring support and/or resistance; waiting for a break of the price level with the expectation that once the break is made – price will continue running in that direction, allowing for the maximization of profits in instances when the trader is correct.

The picture below will illustrate a breakout on the AUDUSD currency pair as it was initially attempting to make its way over parity.

Trading_the_Aussie_js_body_Picture_7.png, Trading 'The Aussie' - AUDUSD

Created with Marketscope/Trading Station

This is the same prescription for volatility that was suggested in the article ‘How to Trade Forex Majors During Active Hours,’ by David Rodriguez; which was part of the larger overall study of Traits of Successful Traders by DailyFX.

Jeremy Wagner exhibited another mannerism of trading breakouts in the article ‘How to Trade a Breakout Strategy on the EURUSD,’ in which he investigated a breakout sell entry on EURUSD. Interesting to note that price on the pair is now ~1500 pips lower since that article was published.

As we saw above, AUDUSD can be more volatile than EURUSD; and as Jeremy and David investigated breakouts on EURUSD in the above references, Aussie can most certainly be used in the same mannerism; as traders are looking for the bigger moves the market may bring while allowing those moves to continue in their favor.

--- Written by James B. Stanley

To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX.

To be added to James’ distribution list, please send an email with the subject line “Notification,” to Instructor@DailyFX.com.

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15 May 2012 03:00 GMT