The Australian Dollar (AUD) is a significant player in the foreign exchange market. This article provides a detailed explanation of why the AUD is considered “risky,” its characteristics, its relationship with export goods and commodity markets, trading volume, and stability. Understanding these aspects of the AUD will be beneficial for traders.
1. Six Reasons Why the AUD is Considered “Risky”
Here are six reasons why the AUD is considered “risky.”
・High Trading Volume
The AUD ranks 6th among world currencies in trading volume. This high trading volume makes it prone to significant price fluctuations, posing a higher risk for investors.
・Extremely Popular Among Japanese Traders
The AUD is highly popular among Japanese traders. The trading volume of AUD/JPY is higher than other currency pairs, with active buying and selling by Japanese traders.
・High Dependence on Trade with China
Australia’s economy is heavily dependent on trade with China. Exports to China support Australia’s economic growth, making the AUD susceptible to China’s economic conditions.
・Trends in Trade Balance
Australia’s trade balance has been increasing, particularly with rising exports to China and higher resource and energy prices. However, a significant deterioration in the trade balance could negatively impact the AUD.
・Pace of Interest Rate Hikes
Australia is also raising interest rates, but the pace must be monitored carefully. If the pace is too fast, it could overstimulate the economy, while a slowdown in rate hikes could also affect the exchange rate.
・Long-term Outlook
The AUD is influenced by Australia’s economic growth and trade surplus. However, future rate hike cessation and transition to an adjustment phase make it a difficult currency to predict in the long term.
These are the main reasons why the AUD is considered “risky.” Understanding these factors is essential when engaging in investment or trading activities.
2. Characteristics of the AUD
The AUD has unique characteristics compared to other currencies. Here, we explain these characteristics.
2.1 Popular as a Resource Currency
The AUD is known as a “resource currency,” with Australia’s main exports being resources like iron ore, coal, and natural gas. This makes the AUD highly sensitive to resource price fluctuations.
2.2 High Trading Volume
The AUD ranks 5th in trading volume worldwide, indicating its high tradability. In Japan, AUD/JPY is the 3rd most popular currency pair.
2.3 Influence of Policy Interest Rates
The policy interest rates set by the Reserve Bank of Australia (RBA) significantly impact the value of the AUD. Interest rates have a strong correlation with exchange rates, so monitoring RBA’s policy rate trends is crucial when trading the AUD.
2.4 Relationship with the Chinese Economy
China is Australia’s largest trading partner, with both economies closely linked. China’s economic indicators and trends can affect the AUD’s value. Additionally, changes in diplomatic relations can also impact the AUD’s exchange rate.
2.5 Characteristics of a High-interest Currency
Compared to other developed countries’ currencies, the AUD typically has higher interest rates. This makes it possible to earn swap points by trading high-interest currencies.
Understanding these characteristics is essential when trading the AUD. Keep an eye on market news and economic indicators, and gather relevant information.
3. AUD Export Items and Commodity Markets
Export items and commodity markets are significant elements of the Australian economy, impacting the AUD’s exchange rate. Australia’s primary exports include mineral resources (iron ore, coal), energy resources (natural gas, oil), agricultural products (wheat, meat), and metal products, accounting for about 21% of the GDP.
Fluctuations in the prices of mineral and energy resources are closely related to the AUD’s exchange rate. For instance, when commodity prices like iron ore, coal, and natural gas rise, Australia’s export revenues increase, boosting the economy and increasing demand for the AUD. Conversely, a decline in commodity prices can reduce export revenues and negatively impact the economy, leading to a decrease in AUD demand.
Understanding the relationship between the AUD’s export items and commodity markets is crucial for predicting the AUD’s exchange rate. Here are some key points:
- Main Export Items: The primary export items are mineral resources (iron ore, coal), energy resources (natural gas, oil), agricultural products (wheat, meat), and metal products.
- Impact of Commodity Prices: Fluctuations in the prices of mineral and energy resources significantly affect the AUD’s exchange rate. Observing commodity market trends and predicting export prices are essential.
- Demand and Value Relationship: An increase in AUD demand can lead to a rise in the AUD’s value, while a decrease in demand can lead to a decline in value.
By understanding these points, you can more accurately predict the AUD’s exchange rate fluctuations. Pay attention to export items and commodity market trends when trading the AUD.
4. AUD Trading Volume Ranking and Stability
The AUD is one of the most traded currencies globally. Let’s look at the reasons for its popularity, its trading volume ranking, and its stability.
A Popular Currency Pair
The AUD is popular among USD-based currency pairs. Specifically, AUD/JPY frequently ranks high in monthly FX trading volumes published by the Financial Futures Association of Japan, indicating active trading by many investors and traders.
High Ranking in Trading Volume
The AUD has a high trading volume, ranking among the top currency pairs globally. This high liquidity makes trading smooth and reduces the spread (the difference between the bid and ask prices).
Stable Economic and Political Conditions
The AUD is considered stable due to Australia’s stable economy and politics. Australia’s abundant natural resources and thriving mining and agriculture sectors, coupled with political stability, make the AUD a trusted currency among investors.
Relationship with the Commodity Market
The AUD is closely related to Australia’s main export commodities market. The AUD tends to respond sensitively to commodity price fluctuations, particularly oil, iron ore, and gold. When these prices rise, the AUD may also rise.
As a Hedging Tool for Forex Risk
The AUD is also used as a hedging tool for forex risk. Many companies and investors hold AUD-denominated assets alongside JPY-denominated assets to hedge against forex risks.
The high trading volume and stability of the AUD are attractive to investors. However, the AUD’s price can fluctuate due to market conditions and economic changes, so caution is necessary when trading.
5. Historical Events of AUD Highs and Sharp Drops
In AUD/JPY trading, determining the selling time is more difficult than the buying time. Let’s look at what happened when AUD/JPY hit highs.
Events When AUD/JPY Hit Highs
May 1997 – Statements by Ministry of Finance Officials
– Statements by Ministry of Finance officials caused a sharp drop in AUD/JPY.Asian Economic Crisis
– From July 1997 onwards, economic crises in Southeast Asian countries and South Korea led to a yen appreciation against the AUD.2007 – Subprime Loan Issue
– The subprime loan issue significantly impacted AUD/JPY.2013 – RBA Rate Cut
– The RBA’s rate cut caused a decline in AUD/JPY.
Determining the selling time for AUD/JPY is challenging compared to the buying time. Even if the same event occurs again, it’s difficult to determine if it will trigger a decline due to the smaller scale of events during drops.
Looking at the exchange rate levels, AUD/JPY peaks were all in the 100-yen range. Therefore, caution is needed after reaching 100 yen, but the decline in 2013 was not significant, leading to another peak in late 2014. It is difficult to pinpoint clear selling points.
The long-term chart of AUD/JPY shows unique price movements, making buying times relatively easier to identify.
Next, let’s look at the events when AUD/JPY hit lows.
Events When AUD/JPY Hit Lows
January 1995 – Great Hanshin-Awaji Earthquake
– After the Great Hanshin-Awaji Earthquake, the yen surged sharply.2001 – Internet Bubble Collapse
– The collapse of the Internet bubble led to a low in AUD/JPY.2008 – Lehman Shock
– The bankruptcy of Lehman Brothers and the subprime loan issue caused a sharp drop in AUD/JPY.March 2020 – COVID-19 Pandemic
– The COVID-19 pandemic caused a sharp drop in AUD/JPY.
The buying time for AUD/JPY can be identified by looking at the patterns of past drops and rebounds. The following are the characteristics of AUD/JPY crashes:
- Significant events occur
- The events are not limited to Japan or Australia
- The lows are all in the 50-yen range
- Sharp yen depreciation after hitting lows
All the lows during AUD/JPY crashes were in the 50-yen range. If a similar crash occurs in the future, the 50-yen range will likely be the lowest point. After crashes, the AUD tends to rise to the upper limit of the range.
The future trend of AUD/JPY can change significantly depending on the current economic situation and international events. To predict future trends, it’s important to consider the impact of economic crises and international events, and to discern risks and opportunities.
Summary
The AUD has high trading volume and significant price fluctuations due to its close relationship with the commodity market. Looking at the historical highs and sharp drops of AUD/JPY, major events and economic crises have been the triggers. It’s important to closely monitor the current economic situation and international events to discern risks and opportunities when trading the AUD. Due to its high volatility, trading the AUD requires caution, but with proper information gathering and analysis, it can be an attractive investment target.
Frequently Asked Questions
Why is the trading volume of the AUD high?
The AUD ranks 6th in global trading volume, indicating its high tradability. In Japan, AUD/JPY is the 3rd most popular currency pair. This high liquidity is an attractive factor for investors.
What factors influence the value of the AUD?
The value of the AUD is influenced by various factors, including Australia’s policy interest rates, its relationship with the Chinese economy, and commodity price fluctuations. In particular, the prices of mineral and energy resources significantly impact the AUD’s exchange rate.
What are some historical examples of sharp drops in the AUD?
Historically, the AUD/JPY has experienced sharp drops due to major economic events such as the Asian Economic Crisis, the subprime loan issue, and the COVID-19 pandemic. These events caused the AUD/JPY to drop to the 50-yen range.
How should one determine the timing of buying or selling the AUD?
Determining the selling time for AUD/JPY is difficult, and pinpointing clear points is challenging. However, the buying time can be identified to some extent by looking at the patterns of past drops and rebounds. It is essential to stay alert to changes in economic conditions and international events.