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 from the Asian powerhouses in the area, and its proximity to Singapore, Thailand, Indonesia, and the like brings both opportunities and strengths from an economic point of view. Australia is a manufacturing powerhouse, yet not in the same way that Asia is a manufacturing region of the world; it is more commodity-related. Coal, iron, gold, silver and other commodities are the main export products, which 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 30% of Australian exports go to China. For this reason, among others, what happens to the Chinese economy will have a strong influence on the Australian one as well. Another reason is that more than 30% of the Australian imports are made in China, but this is not really news, since this percentage is seen in many other importing countries.

What Data Matters for the Australian Economy?

The Australian currency is the Australian dollar (AUD) and the most important currency pair, the AUD/USD, 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, such as 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 AUD/USD pair is a liquid one; more liquid than the USD/CAD pair, for example. Depending on the Forex broker used and the type of the trading account and execution, AUD/USD spreads vary, but they can rival the lower EUR/USD range. As a rule of thumb, the EUR/USD is considered to have the lowest spreads of all the currency pairs that form the Forex dashboard. If you want, this is how you compare one broker with another: by looking at their spreads on the EUR/USD 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 meets on the first Tuesday of every month (excluding January, for obvious New Year’s reasons). Like any central bank, this one too is focused on inflation, and its mandate calls for inflation to be kept below or close to 2%. It is only normal, as all capitalistic economies have 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 Academy, one thing becomes obvious: All of them show the same thing. They are all similar, and only the name or terminology differs: in the Eurozone, it is the Minimum Bid Rate, in the United States the Federal Funds Rate, and in the United Kingdom the Official Bank Rate. These different names show the same thing: the interest rate level set by the central bank.

The interest rate is usually priced in the market, and rarely does a central bank surprise the 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 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 there, so no volatility is expected. The focus shifts to the RBA Statement, as this one is going to point out future changes, if any, 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 proper positioning.
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The RBA Statement

The RBA Statement follows the interest rate announcement, and this is where the focus of market participants 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 the Bank of England doesn’t issue 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 Consumer Price Index (CPI) has crucial implications for the way the Australian Dollar is moving. Even more important than the CPI headline, or the headline inflation, the trimmed inflation figure shows the changes in prices for goods and services, except energy prices. This is similar to the core inflation in the United States.

Gold Data and Prices

Gold is considered more than a commodity, and more like a currency. While it is not a currency per se, it certainly acts like one. Gold is paired with the US dollar, euro and GBP, and can be expressed in virtually any currency. Therefore, it acts 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, which 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 easier to be disrupt than in the case of currencies, and thus volatility goes to extremes. When this happens, 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 AUD/USD pair when the XAU/USD (gold denominated in US dollars) is in a strong bullish trend. The two financial products therefore enjoy a strong direct correlation. Ignoring it is a terrible mistake that will result in losses in the trading account.

PMI’s – Purchasing Managers’ Indexes

The Australian PMIs are similar to those in the rest of the world, mirroring the ones in the United Kingdom. Again, there is no surprise in this! It means that Australians also consider the Construction PMI 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, aside from the classical PMIs. 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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