What are the three most impactful economic indicators for the Australian dollar? This article will detail each of these, which will be beneficial for any fundamental analyst studying this currency.
Despite only having a population of just under 30 million, Australia’s currency, the Australian dollar, is one of the most speculated in the forex markets. It forms part of the major currencies along with the US dollar, British pound, euro, Swiss franc, Canadian dollar, and New Zealand dollar.
Australia is known for being a highly developed economy, ranking 12th in the world’s largest economies and 10th in the highest per capita income. Overall, it is regarded supremely for its excellent quality of life, health, education, low poverty average, above-par average wealth, and democracy.
Given Australia’s significance in the markets, fundamental analysts seek to observe which economic indicators dramatically influence its value against other currencies. In this market, we’ll cover the most impactful of these, along with why and when they are released.
Basic fundamentals of the Australian dollar
As briefly mentioned, Australia is a highly prosperous nation renowned for brilliant commodity exports, education, banking, telecoms, agriculture, and manufacturing.
Perhaps, where Australia shines the most is with commodities, specifically metals and grains. Analysts consider much of the driving force for the AUD to be with commodities that are closely tied to Asia.
Australia’s largest number of immigrants all come from this continent, with many structures in place to foster relationships between the two. As we’ll soon learn in the interest rate section, investors tend to engage in carry trades between Japan and Australia due to the former’s negative interest rate and the latter’s relatively greater interest rate.
Moreover, when commodity prices rise, it generally puts some inflationary force in other developed economies, specifically those in major currencies. At this point, Australia’s economy looks healthier and vice versa when the demand for commodities declines.
In general, the Australian dollar serves as an alternative for any trader seeking some exposure to commodities.
The three impactful AUD economic indicators
Now, we’ll look at the three most impactful economic indicators for the Australian dollar.
Like any economy, interest rates will always feature in the conversation for one of the leading drivers of currency valuations regarding overall monetary policy. Interest rates can affect long-term and short-term fundamental analysis, especially when surprise news about them is released.
The latter often has immediate effects on the currency in question relative to another. Thus, the eight central banks corresponding to the eight major currencies are closely followed, one of which includes the Reserve Bank of Australia (RBA).
Historically, the RBA has held relatively high-interest rates, maintaining a 1.5% figure for much of 2016 until mid-2019, where it started decreasing gradually. At the time of writing, the interest rate is 0.1%, which is still a little higher than other major currencies.
Furthermore, one of the most utilized pairs for carry trades in forex is AUD/JPY because of Japan’s long-held negative interest rates, producing a positive yield when going long in this market. This proves how this indicator affects the depth of foreign investment as the more people hold Australian dollars, the more it increases in value.
The prevalent trend for central banks is increasing the rates when they feel the economy is growing too much to reduce inflation and decreasing them when things are bad to stimulate the economy.
Like most central banks, the RBA is quite cautious and doesn’t make frequent changes. Nonetheless, this doesn’t mean investors do not take note of the Reserve Bank’s future interest rate decision meetings; quite the opposite.
Unlike other central banks, the RBA decides on interest rates 12 times a year, where it is traditionally around eight times. When this group feels hawkish (reducing inflation), higher rates are considered positive for the Australian dollar.
Conversely, when the RBA has a dovish attitude (vitalizing the economy), the result is a lower interest rate, which is taken negatively for the currency. The central bank releases the data typically at 04h30 GMT on a predetermined Monday, Tuesday, and Wednesday of a particular month.
Gross Domestic Product
While the interest rate deals with the monetary stance, analysts frequently use the Gross Domestic Product (GDP) to determine a country’s economic health.
This metric quantifies the total value of an economy, accounting for national income, consumer, investment and government spending, net exports value, and aggregate expenditure for all finished goods and services. The GDP is usually measured over three months.
Presently, Australia ranks 13th for the countries with the highest nominal (before inflation) GDP at roughly $1.6 trillion. The general rule of thumb with the GDP is a higher than projected figure results in a more valuable currency, while a lower than expected reading means less valuable money.
The Australian Bureau of Statistics releases the data every March, June, September, and December for the previous quarter. Announcement for the GDP usually occurs on a Tuesday at 01h30 GMT for these particular months.
Consumer Price Index
The CPI or Consumer Price index is one of the primary barometers of inflation and purchasing power. It looks at the quarterly differences in retail prices of many goods and services ranging from food to recreational activities used by metropolitan households.
If the CPI decreases, analysts consider this as a bearish sign on the currency. Conversely, an increase in the CPI is taken positively for the Australian dollar. The Australian Bureau of Statistics publishes CPI data, which is typically released quarterly on the fourth or fifth Wednesday of a chosen month at 01h30 GMT.
Performing successful fundamental analysis isn’t about looking at one dataset in isolation but rather looking at the relationships between them. For instance, an increase in the CPI often leads to an interest rate hike.
This is because a higher CPI suggests a more expansive circulation of money due to people spending more, which increases inflation. As briefly mentioned, central banks tend to raise interest rates during inflationary periods.
This analogy above is one of several examples of how thoughtful fundamental analysis should be performed when observing the most impactful economic indicators for the Australian dollar and any other currency.