AUD (Australian Dollar): What it is, How it Works, Forex Markets

What Is the AUD (Australian Dollar)?

AUD (Australian Dollar, or "Aussie") is the currency abbreviation for the Australian dollar (AUD), the offocial currency for the Commonwealth of Australia. The Australian dollar is made up of 100 cents and is often presented with the symbol $, A$, or AU$. The AUD replaced the Australian pound, which was a holdover from its days as a British colony, in 1966.

The Australian dollar is also the currency for Pacific Island states of Nauru, Tuvalu, and Kiribati. 

Understanding the AUD (Australian Dollar)

The Australian dollar was first introduced on February 14, 1966, when it replaced the Australian pound. At this time, it was pegged to the Great Britain pound sterling at 2 dollars to one pound. In 1967, Australia abandoned the sterling peg and pegged to the U.S. dollar at 0.8929 Australian dollars to one U.S. dollar. In 1976, it became a moving peg to a trade-weighted index. The AUD became a free-floating currency in 1983.

The AUD is managed by the Reserve Bank of Australia (RBA) is the central bank of Australia, which sets the country's monetary policy and issues and manages the Australian money supply. The bank, entirely owned by the Australian government, was established in 1960.

Since Australia is one of the world's largest coal and iron ore exporters, the value of its currency is heavily dependent on commodity prices. During the commodity slump of 2015, oil prices hit decade lows and both iron ore and coal prices dropped to recent lows. As a result, the Australian dollar weakened sharply, falling more than 15 percent against the U.S. dollar reaching parity against the New Zealand dollar (NZD) - levels not seen since the 1970s. 

AUD and Forex Markets

AUD's popularity among forex traders relates to its three Gs: geology, geography and government policy. Australia is among the richest countries in the world in terms of natural resources, including metals, coal, diamonds, meat and wool. Australia also is a regional power.

The AUD/USD currency pair tends to be negatively correlated with USD/CAD, as well as the USD/JPY pair, largely because the dollar is the quote currency in these cases. In particular, the AUD/USD pair often runs counter to USD/CAD, as both AUD and CAD are commodity block curre. Trading the AUD/USD currency pair is also known as trading the "Aussie." On the other hand, the AUD and NZD tend to be positively correlated.

As of 2019, the Australian dollar ranked as the fifth most traded currency in the world, according to worldwide foreign exchange transactions, accounting for approximately 7% of trade. The high trading volume is due in part to Australia's political and economic stability and to the government's limited intervention in the foreign exchange market.