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Thinking of Trading the Australian Dollar? Check the Fundamentals!

Thinking of Trading the Australian Dollar? Check the Fundamentals!

Benjamin Spier, Technical Strategist

With AUD/USD declining 1000 points over the past two months, now might be a great time to review the fundamental factors influencing Aussie trading…

Aussie Fundamental Factors

EVENT TITLE

EVENT EXPLANATION

IMPACT LEVEL

EFFECT ON CURRENCY

LAST UPDATED

Monetary Policy

The RBA kept the target rate at 2.75% in June, after cutting the interest rate to a record low 2.75% in May from a previous rate of 3.00%. The RBA has cut the interest rate by 2.00 percentage points since November of 2011. The RBA minutes said in June that monetary policy is appropriate for the time being, but inflation may provide scope for further easing.

High

If the RBA decides to cut interest rates, it is Aussie negative, because a lower return on holding the currency will cool demand.

6/4/2013

Economic Growth

Australian GDP expanded by 0.6% in Q1, following the 0.6% expansion in Q4. Q1 GDP expanded 2.5%Y/Y, the slowest annual expansion in nearly two years. The Australian economy expanded at the fastest pace in five years in 2012, at 3.6% GDP growth, as exports and resource investment outweighed subdued manufacturing and construction. The RBA cut is growth forecast from 2.75% to 2.5% for 2013. The RBA said in its May meeting that below trend growth continued into the beginning of 2013.

High

Improved economic growth is Aussie positive as it encourages business investments and leads to expectations for tighter monetary policy.

6/5/2013

Inflation

Annual inflation rose to 2.5% in Q1, the highest inflation rate since Q4 of 2011. Annual inflation rose to 2.2% in Q4. The RBA maintains a 2-3% inflation target. The RBA cut its inflation forecast in June from 3.25% to 3%, but said in May that it expects the target 2-3% inflation rate over the next 1-2 years.

High

Higher inflation is Aussie positive as it raises expectations for tighter monetary policy.

5/7/2013

China

China is Australia’s biggest trading partner and therefore Australian economic growth is helped by an expanding Chinese economy.China GDP came in at 7.7%Y/Y in Q1, compared to expectations for 8.0%Y/Y and down from 7.9% Y/Y for Q4, which was the first quarter to see acceleration in growth in two years. 2012 growth was 7.8%, the least in 13 years. Bloomberg surveyed analysts predict 8.1% growth in 2013. The government announced in March that it is targeting 7.5% growth in 2013. The World Bank estimates Chinese growth will slow to 7% in 2016-2020 and to 5.9% in 2021-2025.AUD/USD fell 90 points to 1.425 following the disappointing Chinese GDP release.Chinese exports rose 1%Y/Y in May, down from 14.7%Y/Y in April, while imports dropped 0.3%Y/Y. The data disappointed expectations and shed a negative light on the Chinese economy.China's manufacturing PMI was released at 48 in June, down from 49.6 in May, which was the first manufacturing PMI below 50.0 in seven months. However, the official government manufacturing PMI rose to 50.8 in May. The HSBC/Markit PMI for services rose to 51.2 in May from 51.1 in April. The official services PMI dropped to 54.3 in May from 54.5 in April.

High

Improved Chinese economic growth is Aussie positive as it may lead to increased exports to China. An increase in exports to China helps improve Australian economic growth, which in turn may lead to expectations for tighter monetary policy.

6/20/2013

Currency Wars

The RBA said the Australian Dollar exchange rate is at an historic high in its May meeting, and said in June that the exchange rate remains high. Australian Treasurer Wayne Swan dismissed talk of a currency war in February, but said he said that a strong Australian Dollar is a concern for an economy that is reliant on mining exports. Treasurer Swan also said in April that Australia has lost 7.5 billion AUD since October because of strong currency and lower terms of trade. RBA Governor Stevens said in February that the currency is somewhat too high, but he would need to be confident of serious overvaluation before intervening.

Medium

Any concrete official talk of currency intervention would be Aussie negative, as it would posibbly lead to a selloff of the Australian Dollar.

6/4/2013

Employment

Employment rose by 1.1 thousand in May, after rising 45 thousand in April. The unemployment rate fell to 5.5% in May from 5.6% in April, which was the highest unemployment rate in 3 years.

Medium

Lower unemployment is Aussie positive, because it reflects improved economic growth, which in turn could lead to expectations for tighter monetary policy.

6/13/2013

Exports

The Australian trade balance declined to 28 million AUD in April, following 555 million in March, which was the biggest trade balance in a year. Exports made up 21% of the GDP in 2011. Australians are worried that the currency’s strength against the US Dollar is slowing exports.

Medium

Improved exports are Aussie positive, because it helps economic growth, which could lead to expectations for tighter monetary policy.

6/5/2013

Risk Correlation

On a yearly basis, AUD/USD has a correlation of about 0.57 to the S&P.Over the past month of trading, AUD/USD had a 0.53 correlation to the S&P.This means that the Australian Dollar usually rises with risk correlations when trading against a safe haven currency like the US Dollar.

Medium

The Australian Dollar may rise along with risk trends.

Ongoing

Upcoming Elections

Australia will hold national elections on September 14.

Medium

Ongoing

Commodity Currency

AUD is a commodity currency and therefore positively correlated with the price of Australian commodities.

Low

An increase in Australian commodity prices is Aussie positive, because of the increased revenue on Australian commodities like gold, coal, and metals.

Ongoing

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to instructor@dailyfx.com .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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