AUD/USD (Australian Dollar/U.S. Dollar)

What Is AUD/USD (Australian Dollar/U.S. Dollar)?

AUD/USD (sometimes written AUDUSD) is the abbreviation for the Australian dollar and U.S. dollar currency pair or cross. The AUD/USD is the fourth most traded currency but is not one of the six currencies that make up the U.S. dollar index (USDX). 

Understanding the AUD/USD (Australian Dollar/U.S. Dollar) Currency Pair

A currency pair tells the reader how much of one currency is needed to purchase one unit of another currency. In this case, the Australian Dollar (abbreviated AUD) is considered the base currency, and the U.S. Dollar (abbreviated USD) is considered the quote currency, or the denomination in which the price quote is given.

The AUD became a free-floating currency in 1983. Its popularity among traders is due to various factors related to geology, geography, and government policy. Australia is among the richest countries in the world in terms of natural resources, including metals, coal, diamonds, meat, and wool.

The AUD/USD abbreviation designates a rate-price quote for which U.S. Dollars can be exchanged for Australian Dollars. The value of the AUD/USD pair is quoted as 1 Australian dollar per quoted number of U.S. dollars. For example, if the pair is trading at 0.75 it means that it takes 0.75 U.S. dollars to buy 1 Australian dollar.

The AUD/USD is one of the world’s top-traded currency pairs. Trading the AUD/USD is also known colloquially as trading the "Aussie." So in conversation, you might hear a trader say, "We bought the Aussie at 7495 and it rose 105 pips to 7600."

The AUD/USD is affected by factors that influence the value of the Australian dollar and/or the U.S. dollar in relation to each other and other currencies. This includes geographical factors such as the production of commodities (coal, iron ore, copper) in Australia, political factors such as the business environment in China (a major customer for Australian commodities), and interest rate influences.

The AUD/USD tends to have a negative correlation with the USD/CAD, USD/CHF, and USD/JPY pairs because the AUD/USD is quoted in U.S. dollars, while the others are not. The correlation with USD/CAD could also be due to the positive correlation between the Canadian and Australian economies (both resource-dependent). 

The AUD/USD and the Australian Economy

The interest rate differential between the Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) will affect the value of these currencies when compared to each other. When the Fed intervenes in open market activities to make the U.S. dollar weaker, for example, the value of the AUD/USD pair could increase. This happens because the Fed's actions move more U.S, dollars into bank circulation, thus increasing the supply of U.S. dollars, and placing downward pressure on the price of the currency.

Assuming no other changes, the Australian dollar will hold its value, and the relative value of the pair increases due to a strengthening of the Australian dollar when compared to the U.S. dollar.

Since Australia is the largest coal and iron ore exporter, the movement of its currency is heavily dependent on commodity prices. During the commodity slump of 2015, oil prices hit decade lows and both iron ore and coal prices slumped. Unsurprisingly the Australian dollar weakened sharply. It fell by more than 15% against the U.S. dollar and nearly hit parity against the New Zealand dollar — a level not seen since the 1970s.