Fundamental Analysis – Explaining the Australian Economic Data

The Australian economy is a special one for the world and for the Forex market. It is a key player and a powerhouse in the Southern hemisphere that has roots in the European history. It makes it a bit different than the Asian powerhouses in the area and its proximity to Singapore, Thailand, Indonesia, and alike, poses both opportunities and strengths from an economic point of view. Australia is a manufacturing powerhouse. However, not like in the way Asia is a manufacturing part of the world, but more commodity related. Coal, iron, gold, silver and other commodities are the main export products. This makes the overall commodities market a crucial one for the Australian economy and for its currency as well. Moreover, it is important to consider where these exports are going. No less than thirty percent of Australian exports are going to China. For this reason, and not only, what happens to the Chinese economy will have a strong influence in the Australian one as well. Another reason is that more than 30% of the Australian imports are China made, but this is not really a news since this percent is seen in many other importing countries.

What Data Matters for the Australian Economy?

The Australian currency is the AUD (Australian Dollar) and the most important currency pair, the AUDUSD, is also called the Aussie pair. Aussie is the nickname for the Australian dollar. The Australian Dollar is strongly dependent on Chinese data and commodities prices, like the gold price. Disruptions in the supply and demand balance for commodities will result in the Australian Dollar fluctuating a lot. As a currency pair, the AUDUSD pair is a liquid one, more liquid than the USDCAD pair, for example. Depending on the Forex broker used and the type of the trading account and execution, the AUDUSD spreads vary, but they can rival the lower EURUSD range. As a rule of thumb, the EURUSD is considered to have the lowest spreads from all the currency pairs that form the Forex dashboard. If you want, this is how you compare one broker with another: by looking at the spread on the EURUSD pair.

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The Cash Rate

The Australian central bank is called the Reserve Bank of Australia (RBA) and it is one of the major central banks in the world. The central bank is meeting on the first Tuesday of every month, excluding January, for the obvious New Year’s reasons. Like any central bank, this one too is focused on inflation, and the mandate calls for inflation to be kept below or close to two percent. It is only normal as all capitalistic economies are having a similar mandate. The interest rate decision is called the Cash Rate, and it shows the interest rate charged on overnight loans between financial intermediaries. If you compare the definition of the interest rate decisions in the different economies we’ve covered so far here on the Trading economy, one thing becomes obvious. All of them are showing the same thing, they are similar, only the name or terminology is different: in Eurozone, it is the Minimum Bid Rate, in the United States it is the Federal Funds Rate, in the United Kingdom is the Official Bank Rate. Only different names showing the same thing: the interest rate level set by a central bank. The interest rate is usually priced in the market. Rarely a central bank is surprising markets with a rate hike or rate cut as, because of the forward guiding principle, central bankers will do their best to properly communicate their intentions prior to the actual interest rate release. As it can be seen in the image below, for March 2017 the forecasted value for the Cash Rate was 1.5%, and the actual one was, indeed, 1.5%. No surprises here, so no volatility is expected. The focus shifts to the RBA Statement, as this one is going to point out future if any, changes in the monetary policy. As always, trading the Forex market from a fundamental point of view requires traders to be ahead of the game, ahead of the curve, and such statements allow for the proper positioning.
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The RBA Statement

The RBA Statement follows the interest rate announcement and this is where the market participants focus is. Any changes in the tone or the wording used will result in changes in the value of the Australian dollar and its counterpart currencies. Like the Cash Rate, the RBA Statement is released on the first Tuesday of the month, excluding January. It is no surprise that until 2007 there was no statement from the central bank unless the interest rate, or the Cash Rate, was changed. Why is it no surprise? Because Australia and England have interconnected historical roots and to this day Bank of England doesn’t have a statement unless the rates are changed.
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CPI – Inflation

As with any democracy and capitalistic economy, inflation has its own influence. The CPI – Consumer Price Index has crucial implications in the way the Australian Dollar is moving. Even more important than the CPI headline, or the headline inflation, the Trimmed inflation shows the changes in prices for goods and services, except energy prices. This is similar with the core inflation in the United States.

Gold Data and Prices

Gold is considered more than a commodity, more like a currency. While it is not a currency per se, it sure does acting like one. Gold is paired with the U.S. dollar, Euro, GBP, and can be expressed in virtually any currency. Therefore, it is acting like a de facto currency, while not having the status of one. Its prices are volatile and depend on many factors, supply and demand being crucial. Unlike in the case of a currency, that can have, virtually, unlimited supply, with gold things are a bit different. In the case of gold, it is all about the above and below ground quantities. And these are limited. For this reason, supply and demand levels are easy to be disrupted than in the case of currencies. Thus, volatility goes to extremes. When this is happening, the Australian dollar is affected as well. To give you an idea about how this correlation works, consider that it is not wise to sell the AUDUSD pair when the XAUUSD (gold denominated in U.S. dollars) is in a strong bullish trend. Therefore, the two financial products are enjoying a strong direct correlation. Ignoring it is a terrible mistake and will result in losses in the trading account.

PMI’s – Purchasing Managers Index

The PMI’s are similar to the ones in the rest of the world, mirroring the ones in the United Kingdom. Again, there is no surprise in this! It means that Australians are considering the PMI Construction as well when looking at the state of the construction sector. In the United States, for example, there is a set of housing indicators to be interpreted, other than the classical PMI’s. The interpretation is the same, against the 50 level. Any print above is bullish, while any print below is bearish for the currency.

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