WHAT IS AUD
AUD is the abbreviation for the Australian dollar, also known as the Aussie dollar or the Aussie, in the international currency market. AUD replaced the Australian pound in 1966, and marked its 50th anniversary as a currency in 2016.
The Australian dollar is the official currency not only in Australia but also in a number of independent countries and territories in the South Pacific, including Papua New Guinea, Christmas Island, the Cocos Islands, Nauru, Tuvalu and Norfolk Island.
AUD became a free-floating currency in 1983. Its popularity among traders relates to its three Gs: geology, geography and government policy. Australia is among the richest countries in the world in terms of natural resources, including metals, coal, diamonds, meat and wool. Australia also is a regional power in Asia.
BREAKING DOWN AUD
AUD, in various pairs, is among the world’s top-traded currencies. It most frequently trades versus the U.S. dollar, known as USD. For background, currencies always trade in pairs, with each part of the pair represented by a three-letter abbreviation, such as JPY for the Japanese yen and CAD for the Canadian dollar.
The AUD/USD currency pair tends to be negatively correlated with USD/CAD, as well as the USD/JPY pair, largely because the dollar is the quote currency in these cases. In particular, the AUD/USD pair often runs counter to USD/CAD, as both AUD and CAD are commodity block currencies.
Factors That May Affect AUD
Like most currencies, AUD moves versus other currencies due to economic releases, including the country’s gross domestic product, retail sales, industrial production, inflation and trade balances. Natural disasters, elections and government policy also affect the relative price of AUD, as well as output and market price for various metals and crops.
In addition, demand for natural resources, especially from other Asian powerhouses such as China and India, affect AUD exchange rates.
The Australian economy and AUD often benefit during periods of rising commodity price. In comparison, the U.S. and other countries that produce many finished goods tend to see inflation amid rising commodity prices, and when this happens, their currencies weaken versus AUD. This sometimes invites traders to long AUD relative to USD.
AUD also benefits from Australia’s typically conservative monetary policy. For instance, the Reserve Bank of Australia did not intervene with economic stimulus to the same degree as the U.S., European Central Bank and the Bank of Japan following the Great Recession. This contributed to higher interest rates in Australia relative to other countries, inviting currency trades to long AUD relative to JPY, for instance, based on the interest-rate differential between these countries. This became one of the most popular currency carry trades of the era.