By Forex Mansion
The AUD/USD trade is a unique and dynamic one in the world of forex. The AUD/USD currency pair is one of the most traded on the market. In order to corner every angle of this trade it is important to analyze the AUD/USD chart on the micro level and also to stay aware of the macroeconomic variables that affect these two currencies.
The tools for analyzing the AUD/USD chart are the rate of change indicator, the directional movement indicator, the parabolic SAR indicator, moving average indicators, the stochastic oscillator, and the relative strength index:
• The rate of change indicator evaluates the value differential of a currency over two different time intervals. This can be helpful when one is comparing the Australian dollar and the US dollar to other currencies over a given time period in which a certain event occurred that affected the market (and you wish to compare how they reacted).
• The directional movement indicator produces a calculation called the average directional movement index (ADX). The ADX is a measure of strength and trending. An ADX of 20 or higher is good indicator that the currency is trending high (upward).
• The parabolic SAR indicator is a calculated prediction for changes in the chart. The calculation is designed to determine when the curve (parabola) of the currency chart will reverse its direction (“Stop and Reverse”).
• Moving average indicators also help measure trending. The moving average is meant to aid by calculating the average value of the currency amongst all the volatility in order to understand if it is trending upward or downward. This calculation tends to lag; therefore, it is recommended to use multiple moving average indicators and to cross-reference them with other indicators.
• The stochastic oscillator helps determine market trends as well. Taking into account peak values and closing values, the stochastic oscillator looks at fourteen denominations of time (hours, days, or weeks…) with the assumption that trending markets close in compliment with the trend. The calculation results in a number between 0 and 100. A score of 80 and above can mean the currency is reaching the end of an upward trend, and a score of 20 or below can mean that a currency is reaching the end of a downward trend.
• The relative strength index (RSI) is an indicator of momentum that is used to determine of a currency has been overbought or oversold (and is therefore riding momentum). A currency that is riding momentum is sure to change direction shortly. The RSI produces a score between 0 and 100. A score of 70 and above generally indicates overbuying, and a score of 30 and below generally signals that the currency is undervalued and is a good buy.
Other Factors that Affect Trading AUD/USD Pairs
Chart analysis only words while simultaneously taking into account the factors that can affect the AUD/USD trade on a macroeconomic level. Some of the key macroeconomic factors that affect the currency trade are gross domestic product (GDP), interest rate, budget deficit, consumer price index (CPI), balance of trade, commodities, and other related currency pairs.
• GDP is the sum total of all goods and services produced by a country. The GDP directly reflects the fiscal status of that country, and therefore is a great positively correlative indicator of the value of the currency.
• The interest rate, as set by the central bank, will greatly affect currency values. When trading AUD/USD one must compare the interest rate set by the Reserve Bank of Australia against the interest rate set by the US Federal Reserve. High interest rates generate an attractive environment for investors and cause currency values to rise.
• The budget deficit is a double edged sword. On the one hand, public debt being owned by foreign governments is bad for the economy and bad for currency value. However, on the other hand, central banks will respond to deficits by raising interest rates (which causes currency to appreciate in value).
• The CPI is a calculation of how much average households are spending on everyday goods and services. The higher CPI is, the higher inflation is, and the higher inflation is, the lower the comparative value of the currency is.
• Balance of trade is the balance between imports and exports. If the exports exceed the imports (a trade surplus) the currency will be strong. If the imports exceed the exports (a trade deficit), it is a sign of a weak economy.
• Commodities generally have a negative correlation to the value of currency. Specifically, gold is known to have a negative correlation to the value of the US dollar. Since Australia exports gold, this commodity has an especially strong impact on the AUD/USD trade. (There is a strong positive correlation between the value of gold and the AUD/USD). Additionally, rising oil prices can have a negative impact on the USD.
• The other related currency pairs that most impact the AUD/USD are USD/CAD, USD/CHF and USD/JPY. The AUD USD has a negative correlation with aforementioned currency pairs.
Properly analyzing the AUD/USD charts while staying on top of all the latest news with regard to the macroeconomic indicators that affect this foreign exchange currency pair is a sure fire way to make the bucks in this cross-pacific trade.
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