The AUD/USD, or ‘Aussie’, is easily one of the single most commonly traded currency pairs on the foreign exchange market for local traders, but how does the relationship work between these two currencies? First, it’s useful to look at Australia’s and the United States’ relationship with commodities such as iron ore, gold and coal.
Correlations between key commodities and the AUD/USD
Australia and the US are both significant suppliers of gold and both currencies have a correlation with the value of the rare metal – although these relationships are not the same. Historically there have been strong positive correlations (around 80%) to be found between gold and AUD/USD prices. Generally speaking, the value of gold goes up along with AUD/USD. On the other side, the value of gold typically works in an inverse or negative relationship to the US dollar’s value. A downward swing in USD tends to encourage gold purchases in other currencies, while an upward swing in USD tends to see a reduction in the demand for gold.
Australia is also a key exporter of iron ore and coal to the world, and as such the strength or weakness of the AUD/USD pair can depend largely on what is affecting the value of these commodities. When these commodity prices fall, you can generally expect the Aussie dollar to be falling in value.
Correlations between AUD and USD
AUD/USD denotes how much of a US dollar is required to purchase an Australian dollar. When economic factors of one country changes, it naturally tends to affect the relationship between the two currency values. If the US Federal Reserve decides to take measures to boost the economy, then the Aussie dollar will generally lower in value in comparison. Keep in mind that there are endless factors that can determine the strength of each currency. In some cases of high volatility, announcements of economic growth and manufacturing in the US can actually bolster the value of the Aussie dollar as our currency is so closely linked to commodity prices.
The AUD/USD has long been a popular currency pair for carry trades. It’s also seen as an attractive option for short term traders due to its exchange rate
fluctuations, and for long term traders due to its relatively stable correlations. It’s important to remember that the relationship between the US and Aussie dollar won’t always be predictable, but if you can learn to play to the trends then you could potentially find opportunities as countless Forex
traders do every day.
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