The Australian dollar is one of the most popular and most traded currencies in the world. When exchanging the AUD is important to understand what moves the currency so you can make better informed decisions. In this article, we look at the various factors that influence the Aussie so you are ready to transfer your funds with confidence.
What moves the AUD?
Economic news, events, market sentiment, and the relationship between the Australian dollar and risk play significant roles. The AUD tends to rise in positive market sentiment and fall during periods of global economic uncertainty.
The Australian economy
Essential resources like iron ore and coal serve as prominent exports. The agricultural sector also contributes significantly to Australia’s power as a major exporter.
Australia’s economic strength is linked to its strategic geographical location as it is close to powerful countries, such as China, Japan, and other thriving economies. This proximity enhances Australia’s economic standing and trade opportunities.
Furthermore, Australia maintains higher interest rates compared to its counterparts, as the Reserve Bank of Australia prioritises controlling inflation. Collectively, these factors contribute to Australia’s relatively robust economy when compared to other nations worldwide.
The Australian dollar as a commodity currency
The Australian dollar is often considered a commodity currency due to the significant role that commodities play in the Australian economy. Several factors contribute to this classification:
- Resource-rich economy: Australia is abundant in natural resources, including minerals, metals, coal, natural gas, and agricultural products. These resources have a substantial impact on the country’s economic performance and export earnings.
- Commodity exports: Australia is one of the world’s leading exporters of commodities, such as iron ore, coal, gold, liquefied natural gas (LNG), and agricultural products like wheat and wool. The demand and prices of these commodities on global markets have a direct influence on the Australian economy and the value of its currency.
- Export revenue: The export of commodities generates a significant portion of Australia’s total export revenue. When commodity prices are high, export earnings increase, leading to greater inflows of foreign currency, which can strengthen the Australian dollar.
- Terms of trade: The terms of trade, which represent the ratio of export prices to import prices, heavily impact a country’s currency value. When commodity prices rise relative to import prices, a country’s terms of trade improve, leading to increased demand for its currency.
- Investor sentiment: The Australian dollar is also influenced by global investor sentiment towards commodities. When there is optimism about global economic growth and rising commodity demand, investors may seek exposure to commodity-related currencies like the Australian dollar, driving its value higher.
- Monetary policy: The Reserve Bank of Australia (RBA), Australia’s central bank, takes into account commodity prices and their impact on the economy when formulating monetary policy. Changes in interest rates or other policy measures by the RBA can affect the attractiveness of the Australian dollar to foreign investors.
It’s important to note that while the Australian dollar is influenced by commodities, it is also influenced by other factors such as interest rates, economic indicators, and global market sentiment. Therefore, its value is influenced by a combination of commodity-related factors and broader economic dynamics.
Factors that help to strengthen the AUD:
- China’s economic growth improves.
- Australia expected to avoid recession.
- Reserve Bank of Australia (RBA) adopts hawkish stance, raises interest rates.
- Resilient Australian economy, expecting further rate hikes by RBA.
- Rising raw material prices boost Australian dollar.
Factors that drive the AUD lower:
- Equity markets experience a decline.
- Demand for the Australian dollar falls due to worries about China and Ukraine.
- Reserve Bank of Australia (RBA) adopts less hawkish monetary policy decisions.
- Australia’s economic outlook appears gloomy.
If you are transferring funds, ensure that you have access to a trusted and reliable currency exchange specialist so you can access the most competitive exchange rates and get the best prices in the industry.