Trading the AUD Crosses

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Author: Martin Penev

Among the most popular currency pairs to trade are the “AUD crosses,” which involve the Australian dollar (AUD) as one of the currencies. In this comprehensive guide, we will delve into the intricacies of trading the AUD crosses, providing insights, strategies, and key considerations for successful trading.

Understanding the AUD Crosses: 

The AUD crosses refer to currency pairs that involve the Australian dollar as either the base or quote currency. The most common AUD crosses include AUD/USD, AUD/EUR, AUD/JPY, AUD/GBP, and AUD/CAD, among others. These pairs offer traders diverse opportunities due to the interplay between the Australian dollar and the respective currencies. Let’s take a closer look at a few examples of AUD crosses:

1. AUD/USD (Australian Dollar/US Dollar): In this currency pair, the Australian dollar is the base currency, and the US dollar is the quote currency. The AUD/USD exchange rate represents the amount of US dollars required to purchase one Australian dollar. For instance, if the AUD/USD rate is 0.7500, it means that 1 AUD is equivalent to 0.75 USD.

2. EUR/AUD (Euro/Australian Dollar): Here, the Australian dollar is the quote currency, and the euro is the base currency. The exchange rate shows how many Australian dollars are needed to buy one euro. If the EUR/AUD rate is 1.6200, it means that 1 euro can be exchanged for 1.62 AUD.

3. AUD/JPY (Australian Dollar/Japanese Yen): Here, the Australian dollar is the base currency, and the Japanese yen is the quote currency. The AUD/JPY rate indicates the amount of Japanese yen required to purchase one Australian dollar. If the AUD/JPY rate is 80.50, it means that 1 AUD is equivalent to 80.50 JPY.

4. GBP/AUD (British Pound/Australian Dollar): In the GBP/AUD pair, the Australian dollar is the quote currency, and the British pound is the base currency. The exchange rate represents the number of Australian dollars needed to buy one British pound. If the GBP/AUD rate is 1.8100, it means that 1 GBP can be exchanged for 1.81 AUD.

5. AUD/CAD (Australian Dollar/Canadian Dollar): In the AUD/CAD pair, the Australian dollar is the base currency, and the Canadian dollar is the quote currency. The AUD/CAD exchange rate reflects the amount of Canadian dollars required to purchase one Australian dollar. If the AUD/CAD rate is 0.9500, it means that 1 AUD is equivalent to 0.95 CAD.

Factors Influencing the AUD Crosses:

1. Commodity Prices: Australia is a major exporter of commodities, and fluctuations in commodity prices can significantly impact the Australian dollar and, consequently, the AUD crosses. Commodity prices, such as iron ore, coal, gold, and natural gas, can influence the demand for the Australian dollar. When commodity prices rise, it often leads to increased demand for the Australian dollar as buyers need to purchase Australian commodities. Conversely, a decline in commodity prices may weaken the Australian dollar.

Example: If there is a significant increase in global demand for iron ore, a key Australian export, the price of iron ore would rise. This would likely result in increased demand for the Australian dollar, strengthening AUD crosses like AUD/USD, AUD/EUR, etc.

2. Interest Rate Differentials: Interest rate differentials between Australia and other countries can impact the attractiveness of the AUD crosses. Higher interest rates in Australia relative to other countries may make the Australian dollar more appealing to investors seeking higher returns on their investments. This increased demand can lead to currency appreciation.

Example: If the Reserve Bank of Australia (RBA) raises interest rates while the Federal Reserve (Fed) in the United States keeps rates unchanged, it can create a higher interest rate differential between the Australian dollar and the US dollar. This could potentially attract investors to hold Australian dollars, strengthening the AUD/USD pair.

3. Economic Data: Economic indicators play a crucial role in influencing currency values. Key economic data such as GDP growth, employment figures, inflation rates, and trade balance reports can impact the Australian dollar and its crosses. Positive economic data can lead to currency appreciation, while negative data can result in depreciation.

Example: If Australia’s GDP growth exceeds expectations, it may create a positive outlook for the Australian economy. This could strengthen the Australian dollar against other currencies, impacting pairs like AUD/EUR, AUD/JPY, etc.

4. Risk Sentiment: The Australian dollar is considered a risk-sensitive currency. It tends to perform well during periods of positive global market sentiment, characterized by confidence and optimism. On the other hand, during periods of risk aversion or negative sentiment, the Australian dollar can weaken.

Example: If there is a global market rally due to positive news on economic growth or trade agreements, it can lead to increased risk appetite. This may result in investors seeking higher-yielding currencies like the Australian dollar, strengthening AUD crosses against other currencies.

5. Geopolitical Factors: Geopolitical events and developments can have a significant impact on the AUD crosses. Political stability, trade tensions, geopolitical conflicts, and policy changes can create volatility in currency markets and influence the Australian dollar’s value.

Example: If there is a trade dispute between Australia and its major trading partners, such as China, it can negatively affect Australia’s export-oriented economy. This may weaken the Australian dollar against currencies like the Chinese yuan, impacting AUD/CNY and other related pairs.

Trading and Strategies for AUD Crosses:

1. Technical Analysis: Utilize technical indicators, chart patterns, and support/resistance levels to identify potential entry and exit points. Common technical tools include moving averages, Fibonacci retracements, and trend lines. Combining technical analysis with other factors can enhance trading decisions.

2. Carry Trades: Given Australia’s relatively higher interest rates, traders may consider employing a carry trade strategy. This involves borrowing a low-yielding currency and investing in the Australian dollar to benefit from the interest rate differential. However, this strategy carries risk and should be approached with caution.

3. Correlation Analysis: Analyze the correlation between the AUD crosses and other markets, such as commodities or equities. Understanding these relationships can help predict potential price movements. For instance, a strong correlation between the AUD/USD and gold prices may provide insights into trading opportunities.

4. News Trading: Stay informed about economic events and news releases that can impact the AUD crosses. A proactive approach to news trading involves identifying key events, monitoring their outcomes, and executing trades accordingly. Be cautious of market volatility during news announcements.

Risk Management: 

Effective risk management is vital when trading the AUD crosses. Implementing the following practices can help protect capital:

1. Set Stop Loss Orders: A stop loss order is a predetermined level at which you will exit a trade to limit potential losses. By setting a stop loss order, you define the maximum amount of loss you are willing to tolerate on a trade. Place the stop loss order at a level that considers market volatility and your risk tolerance.

Example: Suppose you enter a long position on AUD/USD at 0.7500. To manage risk, you decide to set a stop loss order at 0.7450. If the price falls to or below 0.7450, the trade will automatically close, limiting your potential loss to 50 pips. In the case of Eightcap’s floating spreads, please remain advised that slippage might occur, especially around Important announcements, massive trading volumes, and low liquidity.

2. Position Sizing: Determining the appropriate position size based on your risk tolerance is crucial. Position sizing refers to the number of lots or units you trade based on the size of your trading account and the specific trade’s parameters. Consider your risk tolerance, account balance, and the distance between your entry point and stop loss level.

Example: If you have a $10,000 trading account and are willing to risk 1% of your account on a trade, your maximum risk per trade would be $100. If your stop loss level is 50 pips away, you can calculate the appropriate position size to limit your risk to $100.

3. Diversification: Avoid overexposure to a single AUD cross by diversifying your trading portfolio across various currency pairs. Diversification helps spread risk and reduces the impact of any single trade or currency pair on your overall trading performance. Consider including different currency pairs and non-correlated assets in your trading strategy.

Example: Instead of solely focusing on AUD/USD, diversify your portfolio by trading other AUD crosses such as AUD/EUR, AUD/JPY, or AUD/GBP. This diversification can help mitigate risk associated with a particular currency pair or economic factors specific to a single country.

4. Use Trailing Stops: A trailing stop is a dynamic stop loss order that adjusts as the trade progresses and the price moves in your favor. It helps protect profits by allowing you to lock in gains while giving the trade room to continue running if the market moves favorably.

Example: Suppose you are in a long position on AUD/CAD at 0.9500, and the price starts to rise. To protect your profits, you can set a trailing stop order at 20 pips below the current market price. If the price increases to 0.9550, the trailing stop will adjust automatically to 0.9530, securing a profit of at least 30 pips if the price reverses.

These risk management techniques are crucial for managing the inherent risks associated with trading the AUD crosses. However, it’s important to note that risk management should be customized to your trading style, risk tolerance, and specific market conditions. Regularly reassess and adjust your risk management strategies as needed to align with your trading goals and the changing market dynamics.

Most volatile AUD pairs.

Historically, some AUD crosses have exhibited higher levels of volatility compared to others, presenting both opportunities and risks for traders. It is important to be aware of these volatile currency pairs and adapt risk management strategies accordingly. Here are a few examples of AUD crosses known for their historical volatility:

1. AUD/JPY (Australian Dollar/Japanese Yen): The AUD/JPY pair is known for its volatility due to the contrasting economic characteristics of Australia and Japan. This currency pair can be influenced by economic data releases, monetary policy decisions, and risk sentiment in both countries. Changes in commodity prices and interest rate differentials between Australia and Japan can also contribute to heightened volatility. The average daily pip movement for AUD/JPY can range between 50 to 100 pips. However, during periods of increased volatility, it can exceed this range. The average annual pip movement for AUD/JPY can vary, but it has been known to range between 2,000 to 3,000 pips in certain years. However, it’s important to note that this is an average and the actual pip movement can be higher or lower depending on market conditions.

2. GBP/AUD (British Pound/Australian Dollar): Considered one of the most volatile AUD pairs. Some key factors that contribute to the volatility of the GBP/AUD pair besides the usual Economic indicators such as GDP growth, inflation, employment figures, and central bank policies are changes in market sentiment and risk appetite which can affect the demand for higher-yielding currencies like the Australian Dollar relative to safe-haven currencies like the British Pound. Fluctuations in commodity prices, particularly those related to China’s demand, The liquidity and participation of various market players, including financial institutions, hedge funds, and speculators, can influence the volatility of GBPAUD. Large order flows, algorithmic trading and sudden shifts in market positions can contribute to increased price volatility. The GBP/AUD averages between 80 to 120 pips daily and the annual yearly pip movement can go roughly to 10,000 to 15,000 pips.

3. AUD/NZD (Australian Dollar/New Zealand Dollar): The AUD/NZD pair, commonly referred to as the “Aussie Kiwi,” can exhibit notable volatility as it involves two neighboring countries with closely intertwined economies. Economic indicators, monetary policy decisions, and commodity prices in both Australia and New Zealand can impact the pair. Additionally, fluctuations in global dairy prices, as New Zealand is a major dairy exporter, can contribute to volatility in this cross. The average daily pip movement for AUD/NZD typically falls between 60 to 90 pips. It’s important to note that this pair can experience higher volatility during economic releases or significant news events. The average annual pip movement for AUD/NZD typically falls within the range of 1,500 to 2,500 pips. However, similar to other currency pairs, the pip movement can fluctuate significantly from year to year.

3. AUD/CAD (Australian Dollar/Canadian Dollar): The AUD/CAD pair can be subject to volatility due to the similarities between Australia and Canada as commodity-exporting nations. Fluctuations in commodity prices, particularly those related to energy and natural resources, can impact both currencies. Additionally, economic indicators, interest rate differentials, and trade relations between Australia and Canada can contribute to volatility. The average daily pip movement for AUD/CAD generally ranges between 70 to 100 pips. However, it’s important to consider factors such as commodity prices, economic data, and market sentiment, as they can influence the pair’s volatility. The average annual pip movement for AUD/CAD can range between 2,500 to 3,500 pips. This pair can be influenced by economic factors, commodity prices, and interest rate differentials between Australia and Canada.

4. AUD/CHF (Australian Dollar/Swiss Franc): The AUD/CHF pair can exhibit significant volatility due to the divergent economic characteristics of Australia and Switzerland. This pair usually offers 50-80 pips daily on average and the annual yearly pip change is 4 000 – 6 000 Pips

5. AUD/SGD (Australian Dollar/Singapore Dollar): The AUD/SGD pair can be subject to volatility due to the close economic ties between Australia and Singapore. Changes in economic indicators, monetary policy decisions, and trade dynamics can impact this cross, particularly considering Singapore’s role as a major financial hub in the region. The average daily pip movement for AUD/SGD generally ranges between 40 to 80 pips. The average yearly pip movement is approximately 3,000 to 4,500 pips.

Keep in mind that these figures are provided as rough estimates and may not reflect the current market conditions.

It is important to note that while these currency pairs have displayed historical volatility, market conditions can change over time. Therefore, it is essential to conduct a thorough analysis and consider current market dynamics before trading any currency pair, including the AUD crosses.


* The information provided here has been prepared by Eightcap’s team of analysts. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and do not reflect the opinions of Eightcap.
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