Australian Dollars

The Australian dollar is a commodity-based currency and is currently the sixth most traded currency in the world currency market (behind the US dollar, the euro, the yen, the British pound and the Swiss franc).

It accounts for approximately 5% of the total volume of foreign exchange transactions (approximately 1.9 trillion dollars a day). Its popularity is due to the fact that there is little government intervention in the currency and a general view that Australia has a stable economy and government.

For much of its history, the Australian dollar was pegged to the British pound however, that changed in 1946, when it was pegged to the US dollar under the Bretton Woods system. When this system broke down in 1971, the AUD moved from a fixed peg to a moving peg to the US dollar.

 Then in September 1974, it moved to a moving peg against a basket of currencies called the TWI (trade weighted index) because of concerns about the fluctuations in the US dollar. This continued until December 1983, when the then Labour government under Prime Minister Bob Hawke and Treasurer Paul Keating floated the Australian dollar.

The  Australian dollar is now governed by its economies terms of trade. Should Australians commodity exports (minerals and farms) increase then the dollar increases. Should mineral prices falls or when domestic spending is greater than exports, then the dollar falls.

The resulting volatility makes the Australian dollar an attractive vehicle for currency speculators and is the reason why it is one of the most traded currencies in the world despite the fact that Australia only comprises 2% of the global economic activity.

Over the last 23 years as a free floating currency, the Australian dollar has usually served as a proxy for gold due to the fact that Australia is the second largest producer of gold after South Africa. Fluctuations in the price of gold have seen corresponding rise and falls in the Australian dollar.

As well as its relationship with gold, like the Canadian and the New Zealand dollars, the Australian dollar is a commodity currency. Agriculture and Resources Economic, commodity sales are expected to total AUD billion or about 55% of Australias exports, hence any movements in commodity prices will effect the Australian dollar.

Expectation over the next few years is for a gradual easing of world economic growth, which should see the price of Australian commodities average lower and result in downward pressure on the Australian dollar especially in late 2006/2007.

It should however be noted, that there is considerable uncertainty in predicting Australian dollar movements since it can be significantly influenced by a change in market sentiment. Since the floating of the Australian dollar in 1983, the currency has fluctuated in an average range of 10 cents a year.

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Stock Exchange Markets Rates

Currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged is called the exchange rate. The majority of the currencies are traded against the US dollar (USD).

The four next-most traded currencies are the Euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP) and the Swiss franc (CHF). These five currencies make up the majority of the market and are called the major currencies or "the Majors". Some sources also include the Australian dollar (AUD) within the group of major currencies.

The first currency in the exchange pair is referred to as the base currency and the second currency as the counter term or quote currency. The counter term or quote currency is thus the numerator in the ratio, and the base currency is the denominator.

The value of the base currency (denominator) is always 1. Therefore, the exchange rate tells a buyer how much of the counter term or quote currency must be paid to obtain one unit of the base currency.

The exchange rate also tells a seller how much is received in the counter term or quote currency when selling one unit of the base currency. For example, an exchange rate for EUR/USD of 1.2083 specifies to the buyer of euros that 1.2083 USD must be paid to obtain 1 euro.

At any given point, time and place, if an investor buys any currency and immediately sells it - and no change in the exchange rate has occurred - the investor will lose money.

 The reason for this is that the bid price, which represents how much will be received in the counter or quote currency when selling one unit of the base currency, is always lower than the ask price, which represents how much must be paid in the counter or quote currency when buying one unit of the base currency.

For instance, the EUR/USD bid/ask currency rates at your bank may be 1.2015/1.3015, representing a spread of 1000 pips (also called points, one pip = 0.0001), which is very high in comparison to the bid/ask currency rates that online Forex investors commonly encounter, such as 1.2015/1.2020, with a spread of 5 pips.

In general, smaller spreads are better for Forex investors since even they require a smaller movement in exchange rates in order to profit from a trade.

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