How to Trade the AUD/USD (Australian Dollar/US Dollar)

How to Trade the AUD/USD (Australian Dollar/US Dollar)

Reading time: 7 minutes

If you decide to get into Forex trading (trading currencies on the Foreign Exchange market), you also need to decide which currency pairs to focus on and learn about their characteristics, drivers, and market dynamics, as it will help you fine-tune your Forex trading strategy. Let’s focus on one of the most popular Forex pairs: the AUD/USD.

What Is the AUD/USD Currency Pair?

The AUD/USD currency pair, also known as the Aussie Dollar, is the exchange rate between the Australian Dollar (AUD) - the base currency, and the American Dollar (USD) - the quote currency. This means that you will trade the AUD against the USD, and the exchange rate represents how many USD you can get for 1 AUD (the base currency always represents 1 unit).

The AUD/USD is one of the most traded ‘major currency pairs’ in the Forex market, alongside the EUR/USD, the GBP/USD and the USD/JPY, thanks to its high liquidity and the strength of both economies internationally.

Just like other currency pairs, the trading hours of the AUD/USD is around the clock (five days a week), but trading volume is generally higher during the Sydney trading session. The pair’s unit of change (also known as pip) is the fourth (0.0001) or fifth (0.00010) decimal place, depending on the broker. 

The AUD is considered a commodity currency due to the various natural resources of Australia, such as iron ore, coal, gold, natural gas, and agricultural products, which means there is a positive correlation between commodity prices and the Australian economy. On the other hand, the USD is the most widely used currency in international trade and the most important reserve currency in the world. It is also the currency used to buy and sell most commodities on the financial markets, indicating a negative correlation between the USD and commodity prices. This sensitivity to commodity prices means the pair exhibits higher volatility than other major currency pairs.

Let’s now have a look at the two most popular ways to decide whether to buy or short-sell the AUD/USD currency pair: fundamental analysis and technical analysis.

Fundamental Analysis of the AUD/USD

If you decide to use fundamental analysis to trade the AUD/USD, you will first have to understand the main drivers of the Australian and American economies to have a better idea of each country’s economic landscape and prospects.

To get a better idea of the health of an economy, there are different types of macroeconomic data you need to monitor, such as inflation (CPI, PPI, PCE), employment (NFP, unemployment rate, JOLTS), growth (GDP), and sentiment figures (PMI, for example). An economic calendar is a must-have tool for any Forex trader to keep an eye on such figures.

Besides economic developments, central banks’ decisions regarding their respective country’s monetary policy’s trajectory have the biggest influence on the supply and demand of a currency, which, in turn, influence the value of currency pairs depending on the interest rate differentials. 

Usually, higher interest rates are ‘bullish’ for a currency, while lower interest rates are ‘bearish’. For instance, if the Reserve Bank of Australia (RBA) raises interest rates and the US Federal Reserve (the Fed) holds the Fed Funds target rate unchanged or cuts rates, the AUD/USD could rally.

As of writing, both central banks have been extremely aggressive in their monetary policy tightening cycle since 2022. However, many analysts believe that rates have now reached their peak level and will likely remain at this level for an extended period of time (the famous ‘higher-for-longer’ interest rate environment). The RBA increased its cash rates from 0.10% in April 2022 to 4.35% in November 2023, while the Fed increased its Fed Funds effective rate from 0.08% in February 2022 to 5.33% in November 2023.

Technical Analysis of the AUD/USD

Depending on your trading knowledge and experience, there is a wide range of trading tools and technical indicators you can use to analyse in real-time the price action of the AUD/USD with technical analysis - whether it be through very short-term trading styles like scalping and day trading, or strategies with longer timeframes, like swing trading.

Some of the most widely used technical indicators for trading the AUD/USD:

• Moving Averages (MAs) are often used as a trend-following indicator, a dynamic value used to filter price action to view the underlying trend. MAs are also used as dynamic support and resistance levels, and as a trading signal through moving average crossovers.
• Relative Strength Index (RSI) is used to spot overbought and oversold conditions, as well as bearish and bullish divergences, that could trigger a price reversal. Just bear in mind that the RSI can remain overbought and oversold for prolonged periods in trending environments and, therefore, deliver a number of false signals.
• Bollinger Bands to measure volatility and obtain price targets, as well as potential reversal signals when prices exit the bands. It is also possible that the pair remains close to the upper/lower band for a while, which shows the strength of the bullish/bearish trend.

Want to start trading the AUD/USD? 

Consider opening a live or demo trading account with FP Markets today. In addition to Forex, we offer CFDs on more than 10,000 financial instruments.