The forex market has been all over the place during 2020, both in Australia and further afield. World currencies have seen a high level of volatility and turmoil, which doesn’t have to be a bad thing for traders. But what are the main factors impacting the performance of the Australian Dollar?
Australia noted a difficult start to the year due to the pandemic, which had a profound effect on the performance of the dollar. The country has close economic and trade ties with China which suffered in the early stages of the crisis. Changes to the Chinese economy had an impact on the Australian economy causing widespread disruption. According to PwC, the AUD is a “proxy” for the Chinese Yuan and as such, the AUD depreciated against the USD to levels not seen since the global economic recession in 2008.
Despite this, analysts state that the negative impact is not likely to continue. The AUD noted an increase in value following the victory of Joe Biden in the US Presidential Elections. While the pandemic continues, countries and businesses have started to adapt to the “new normal” and this could see things levelling out in the next few months.
As in any country, a decline in the workforce or an increase in the employment rate has an impact on the value of the currency. The unemployment rate is what’s known as a lagging indicator which means it changes after the economic state of a country has changed and not before.
Unemployment figures can also give an idea of economic stability and the forecast in the short term. In particular, through analysis of different sectors that may be shedding workers, one can tell if the issue is domestic, or international. In other words, the unemployment rate in Australia, particularly in sectors that are of great importance to the economy, can negatively, or positively impact the value of the AUD.
One of the factors that have the biggest impact on forex markets is the interest rates in that applicable country. Interest rates are generally decided by the eight international central banks and are direct reactions to a combination of economic indicators. The thing with interest rate fluctuations is that they can happen quickly and act in ways that are not anticipated. This can either be great news, or a challenge for forex traders.
The key is being able to predict, at least to a certain extent, how these changes will occur and to use it to their advantage. To a certain extent, interest rates can be estimated through the use of economic models but news, world events, and even natural disasters can change things in a second.
For beginner traders, it’s important to understand that the higher the interest rate, the better a currency performs. Many online trading sites have built-in tools that can track the performance of a currency over time and these can then be compared with interest rate changes over the same period. Together and in combination with other tools, intelligent forecasts can be made. The Top Rated Forex Brokers site allows traders to search for the optimum trading platform for them, as per around 200 different criteria. This can include forecasting tools so that they can use the information on interest rates, and even other factors in this article, to make more accurate trades
Seasoned forex traders know that you have to look way beyond finance to understand the forex market. For example, the commodities market can have a big impact on the way currency values such as the AUD perform. Australia is one of the world’s largest producers of iron ore, and coal, as well as gold, copper, zinc, and nickel.
The AUD is closely linked to gold a commodity and its value has a high correlation with how gold performs on the commodities market. When the price of gold rises, so too does the AUD. The same can be said, to a certain extent to the coal, iron ore, and other metals markets. As these account for such a large part of Australia’s economy, it makes sense that the two are linked.
These are just a few examples of what can affect the value of the AUD or any other currency. You should also consider the performance of neighbouring currencies, trade partners, and the stock market before making any big decisions.