Australian dollar is getting stronger. Here's why.

Key points

• AUD/USD is up 4% since mid-April
• Yields on the Australian 10-year bond have surpassed the US, above 4.35%
• AU's monthly CPI indicator beat expectations at 4% in May
• AUD's future may depend, in part, on the success of the Chinese economy

Australian dollar up 4% since April

The AUD/USD currency pair has shown a significant rebound in recent months, climbing from just under 0.6400 to nearly 0.6700 since April. This 4% increase highlights a robust recovery phase for the Australian dollar in the forex markets, against USD and other major currencies. It is worth noting, however, that AUD/USD has struggled to break through the 0.6700 price level since first hitting the mark in May due to continued US outperformance.

Why is Australian dollar so strong?

The Australian dollar's strength can be attributed in part to Australia's interest rates, which currently surpass those of other major economies, including the US. Currently, the yield on Australia's 10-year government bond is above 4.35%, higher than the US 10-year after dropping to end June. The Reserve Bank of Australia (RBA) has played a large part in this, holding overnight rates at a 13-year high at 4.35%. High interest rates typically attract foreign investment into Australian assets, increasing demand for the AUD.

Australian inflation moving higher

The Consumer Price Index (CPI) in Australia surged to 4% year-over-year in May, marking a six-month high. This rise in inflation reflects increasing prices within the economy, which could influence future monetary policy decisions by the Reserve Bank of Australia. Markets have not ruled out another hike from the RBA at their next meeting in August.

AUD/USD could move to 0.8000

If Australian dollar strength continues, AUD/USD has historical context to approach 0.8000, a level it previously reached in 2018, and even as high as 1.1000 back in 2011. Current market dynamics, including interest rate differences and economic data, could pave the way for such movements.

The key to Australian growth

Australia's economic expansion could accelerate if it achieves higher GDP growth rates and benefits from stronger economic ties with China. Australia saw a strong rebound from the Covid-19 pandemic but has not seen the same sustained GDP growth as the US. A bump in GDP growth could further boost the AUD, making it an attractive prospect for forex traders.

China essential to Aussie dollar

The economic relationship between China and Australia plays a crucial role in the historical performance of the AUD/USD. As Australia's largest exporter, the Australian economy has a strong dependence on the Chinese economy. This trend can be seen in the historically positive correlation between Chinese stocks (FXI) and the Australian dollar. Traders should closely monitor developments in China, as shifts in this major economy have historically impacted the Australian dollar significantly.

How to trade AUD/USD

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on AUD/USD

Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.

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