The AUD/USD pair is the abbreviated term used for the Australian dollar and the US dollar, nicknamed as Aussie. Before we get into the particulars, what exactly does AUD/USD rate mean? The exchange rate tells you how many US dollars (quote currency) are required to purchase one Australian dollar (base currency). For example, if the pair is trading at 0.73, it means it takes 0.73 US Dollars to buy 1 Australian Dollar.

The Australian dollar is known as a commodity currency due to the role of Australia in global gold production and export. AUD/USD exhibits a long-term positive correlation with the value of gold. Since the Australian dollar is a first currency (base currency), the pair is called a direct currency.

Breaking Down ‘AUD/USD’

The cross made up of the Australian dollar and the US dollar is now the fourth most actively traded currency pairs. Lately, AUD/USD has represented around 7% of total forex market turnover. Despite that, it isn't one of the six currencies that form the US dollar index.

What Determines the AUD/USD Exchange Rate?

Several factors can impact the AUD/USD rate valuation, including:

RBA & US FED Monetary Policies: The Reserve Bank of Australia and the Federal Reserve control the supply of money in the market, to keep the economy on track. A dovish policy, which is also known as expansionary policy, weakens the currency. In contrast, a hawkish monetary policy (contractionary policy) strengthens the currency.

Economic Events: Any movement in the US and Australian economic events determine the exchange rates. Top of the line economic events include GDP, Employment Change, Industrial Production, and Consumer Price Index. Better than forecast data increases the demand for related currency and impacts the value of either the Australian Dollar or the US Dollar, causing fluctuations in the AUD/USD exchange rate.

Currency Correlations

Correlation is merely a mutual relationship or connection between two or more things.

Positive correlation – The positive relationship is simply when pairs move in tandem with each other.

In the forex world, the AUD/USD, GBP/USD, and EUR/USD currency pairs are positively correlated. It's because all these pairs have a dollar in the denomination. So, any change in the US dollar will be reflected in these pairs.

Negative correlation – In contrast, a negative correlation is when forex pairs move in the opposite direction. For example, USD/CHF, USD/JPY, and USD/CAD pairs share a negative correlation. It's because the US dollar is the base currency and is in the numerator.

Gold & Aussie: One essential characteristic of the AUD is that it has a high positive correlation with gold prices. The reason behind this is that Australia is the third biggest gold producer in the world. As a result, whenever the price of gold rises or falls, the Aussie goes along for the ride.

Major Economic Events:

Gross Domestic Product – the Gross domestic product is the central measure of economic growth in the region.

Employment Change – The Australian Dollar is sensitive to changes in employment, as slacks in the labor market cause a drop in Inflation rates.

Consumer Price Index – Since one of the goals of the RBA is to maintain price stability, they keep an eye on inflation indicators such as the CPI. If the annual CPI deviates from the central bank’s target, the RBA could make use of its monetary policy tools to keep inflation in check.

The balance of Trade – Australia has an extremely robust trade sector, so currency traders and bank officials alike tend to watch changes in the country’s export and import levels.

Political announcements & natural disasters – Besides the scheduled economic events, the political elections, new systems, wars, terrorist incidents, and natural calamities, etc. can all cause severe variations within the AUD/USD.

AUD/USD Specifications

The AUD/USD is traded in amounts denominated in the US Dollar.
Standard lot Size: 100,000
Mini lot size: 10,000
One pip in decimals 0.0001
Pip Value: $10

Formula

Profit/Loss = (Bid Price – Ask Price) X Contract Size X Number of Lots