The Guide to AUD/USD Trading: Market Dynamics, Technical Patterns, and Key Indicators

27 Jun 2024

By Lim Jun Kit, Strategist for Phillip Nova

Introduction to AUDUSD

The AUD/USD currency pair represents the value of the Australian dollar (AUD) relative to the US dollar (USD) and is one of the most actively traded pairs in the Forex market. The pair is significantly influenced by economic indicators from both Australia and the United States, including interest rate decisions, GDP growth, employment data, and trade balances. The Australian economy’s reliance on natural resources and commodity exports, especially iron ore, coal, and gold, makes the AUD/USD pair sensitive to commodity price fluctuations and demand from major trading partners like China. Additionally, the interest rate differential between the Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) can impact the exchange rate, with higher interest rates in Australia typically strengthening the AUD. The pair is also influenced by risk sentiment, appreciating during times of global economic optimism and depreciating during periods of economic uncertainty. Trade relations between Australia and major partners, particularly the US and China, play a crucial role, and any changes in trade policies, tariffs, or geopolitical tensions can affect the AUD/USD pair.

The AUD/USD currency pair is known for its volatility, reacting to global economic events, commodity price changes, and geopolitical developments. It is most active during the overlapping trading hours of the Australian, Asian, and US sessions. The pair’s historical context includes significant fluctuations due to major economic events such as the Global Financial Crisis in 2008, changes in commodity prices, and differing monetary policies between the RBA and the Fed. Overall, the AUD/USD pair is dynamic and heavily monitored by traders and investors who consider various economic factors and global events to inform their trading strategies.

Technical outlook

After peaking around 0.8000 in February 2021, the AUDUSD has been on a massive downtrend to currently hovering around the 0.6650 region. The pair started the year at 0.68 where sellers dominated the markets, and eventually bottomed at 0.6360 on 19 April after which the AUDUSD posted a strong rebound to test the resistance zone of 0.6700. Throughout May and June, the AUDUSD consolidates in a narrowing range, forming a symmetrical triangle. The symmetrical triangle is typically a continuation pattern, however, as there isn’t a strong bullish trend preceding the pattern, there isn’t a clear directional bias. Despite the lack of clear direction, traders can await for the confirmation by a breakout in either direction. An upside breakout from the triangle would provide opportunity for traders to trade an uptrend towards a price target at 0.687, while a downside breakout would send the pair testing support around 0.6440.

Watch out for these high impact events in July that would drive volatility in AUDUSD:

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

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Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

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