If you are a forex trader in Australia, you may be wondering if the Australian dollar is a good currency to trade in the financial markets. The good news is that it does in fact look promising, and it is one of the major currencies in circulation today. In fact, it is one of the most actively traded currencies around the world, frequently against other major currencies such as the US dollar and the Japanese yen.

In this article, we will explore the Australian dollar by giving a brief introduction to how traders view it in the forex market. We will also look at what it means for the Australian dollar to be a ‘commodity currency’, the commodity it ties itself to, and what this means for forex traders who want to trade AUD.

If you are an Aussie considering trading the dollar and want a few tips on how you can maximise your chances in the market, read on.

Introducing the Australian dollar as a currency

The Australian dollar, abbreviated as AUD, is a major currency pair in forex trading. There are seven major currencies, and the rest of the six are the US dollar (USD), the Japanese yen (JPY), the Great Britain pound (GBP), the Canadian dollar (CAD), the Euro (EUR), and the Swiss franc (CHF). These are the most traded currencies, and for good reason – they all come from strong economies.

Traders thus often trade AUD with the US dollar, the Japanese yen, and the Great Britain pound, due to the country’s close economic ties and trading relationships. These currency pairs are the AUD/USD, JPY/AUD, and GBP/AUD. Traders trade these forex pairs to potentially profit from changes in exchange rates, as well as to hedge against currency exposure.

AUD as a commodity currency

When forex trading in Australia, you may have encountered the phrase ‘commodity currency’ and the Australian dollar being described this way.

A commodity currency is a currency that is pegged to a commodity, such as a type of industrious or precious metal, oil, natural gas, coal, or agricultural products like wheat, rice, and coffee. Usually, commodity currencies arise when a nation or region has heavy reliance on the exports of certain products, and the demand for these products become directly linked to the performance of the national or regional economy. This causes the related currency then to fluctuate based on this demand.

Australia is a huge country, and it is a major exporter of a variety of commodities, including iron ore, coal, natural gas, gold, copper, and agriculture products such as wheat, sugar, beef, and dairy. Australia’s biggest trading partners include Japan, the US, and South Korea. The demand for these commodities globally plays a significant part in how the Australian economy performs, which influences the price of AUD.

For example, if there is a massive demand for iron ore, Australia’s economy will flourish, which can push the price of AUD up. This is a great time for forex traders to then buy AUD and sell another currency that is underperforming or bearish. However, if there is not so much a great demand for a certain commodity, such as gold, during a particular time, then the price of gold will fall, along with the price of the Australian dollar.

Other factors that drive the price of AUD

Outside of the demand for the commodities and Australian exports, there are other drivers that influence the price of AUD. Some of them include the supply of these exports, Australia’s relationship with its trading partners, and the performance of the Australian economy.

Supply of commodities

another big driver that influences the price of AUD is also the supply of such commodities. If there is a dip in supply levels and ability in Australia for iron ore or agricultural products (at times due to climate issues), it will either drive the price of commodities even higher, or it will cause other countries to lose interest in trading with Australia entirely. This can cause the AUD to rise or drop, respectively.

International trading terms

Australia maintains its economy by having cordial relationships with its neighbouring countries and with other countries and regions globally. Some of Australia’s biggest trade partners are Japan, South Korea, the US, and China. Maintaining a good relationship with these countries can directly influence the demands for their exports. If there is any animosity between Australia and its trading partners, this can indirectly influence the price of AUD.

The Australian economy

Many forex traders understand that a nation’s overall economic health has tremendous influence on how their currency performs in the forex market. Some factors include the Gross Domestic Product (GDP) of Australia, its inflation and interest rates, and national employment levels. As the economy performs well, so does the currency in the forex market.

The price of the US dollar

Finally, the price of the US dollar also has an influence on the price of the Australian dollar. This is because the US dollar is the world’s most common’s reserve currency, and many industry professionals consider AUD as a proxy for USD.

Tips for AUD traders

Having gone through a basic overview of the Australian dollar, we know that the currency is not too complex, and there are many opportunities for those who want to trade it. Below, we offer some tips for traders:

Diversify your portfolio

One of the most important tips traders often hear is that they must diversify their portfolio. This remains true for Aussie traders who want to trade their native currency. They can diversify their portfolio with products and instruments less tied to the Australian dollar, such as non-Australian exports in the commodity market or with currencies from Australia’s trading partners.

Hedge your trades with commodities

Knowing there is often a positive correlation between the price of AUD and the price of certain commodities, such as iron ores and gold, traders can certainly hedge their existing trades with commodities. If AUD is bearish, they can open new positions selling AUD in the forex market, or they can flock to commodity trading and purchase derivatives to tide them over. This gives traders more flexibility during times of financial distress or downturn.

Keep an eye out on international trade

Finally, one of the best tips for Aussie traders in the forex market is to keep an eye out on international trade. With commodity trading being one of the top activities in Australia, it is essential that the country maintains positive political associations with its neighbours and around the world. It is also important to keep an eye out for conflicts and sanctions. Australia is geographically far away from countries that are prone to conflict, but it does not mean the country is immune from political instability and unfavourable trade terms.

The bottom line

If you are a trader of the Australian dollar, it is essential that you understand the factors that influence the currency’s rates. More broadly, you should also learn how forex trading works and how the forex market operates. You should also remember that though the Australian dollar is a relatively stable commodity and the country largely free from political conflict, you should never expect guaranteed returns from forex trading as it contains risks, and the market is ultimately unpredictable.