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Trading the Australian Dollar

Australia is a major producer of raw materials, particularly base metals, and as such its currency has been boosted by increasing global demand for its products. After the Japanese yen, the Australian dollar (also referred to as the Aussie by currency traders) is arguably the most widely held currency in the Asia Pacific region, and is ranked number five in the world in terms of daily volume. In 2010 it accounted for 7 of total global FX trading volumes.

The Aussie has been around since 1967, when Australia left the sterling area following the British pound’s devaluation against the US dollar. It only became a free-trading currency in 1983, when Australian prime minister Bob Hawke cancelled its previous peg to a basket of other currencies.

Forex traders like the AUD for a number of reasons, including Australia’s exposure to the commodities price cycle, to the booming Asian economies (Australia has been a direct beneficiary of China’s economic growth), and the fact that it is not one of the Big Four currencies most commonly traded (the US dollar, the Japanese yen, the euro, and the British pound). The currency tends to perform worse during bust cycles, as global demand for commodities slumps, but outperforms the more popular currencies in boom times. Australia was the first major developed nation to start raising its interest rates in the wake of the 2007-08 crisis. Australia also never entered a technical recession during this period.

Australia has an independent central bank, the Reserve Bank of Australia, which is responsible for setting interest rates. Currency analysts and economists favour Australia because of its sound monetary policy and its political stability, as well as the AUD’s correlation with resources prices.

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