Forex Trading: AUD/USD Establishing New Price Trends

Forex markets have seen some significant changes over the last few quarters, and some of the biggest differences have been seen in the AUD/USD forex pair.  When we are looking at the comparative value of the Australian Dollar against the US Dollar, central bank activity is rising in terms of its influence and importance.  For these reasons, forex traders will need to continue monitoring central meetings at the Federal Reserve and the Reserve Bank of Australia.

Interest Rate Outlook

Recent policy commentaries at the Federal Reserve have shown that it is becoming less and less likely that we will see new interest rate increases added to the current outlook.  Stalling growth prospects in the world’s largest economy have made it more difficult to raise interest rates as this could lead to declines in the national labor market.  Lower interest rate prospects might have it harder for the USD to gain traction, and this would ultimately lead to higher valuations in the AUD across several currency pairs.

Forex traders are able to initiate trading positions in the AUD/USD using a capable forex trading platform that offers broad access to a large number of currency pairs.  These types of trading platforms will allow investors to buy or sell the AUD so they can be highly versatile in cases where new trends are ready to start developing in the Australian currency.

Carry Trades

One of the most popular forex trading strategies in the market is the carry trade, which will actually allow investors to benefit from the interest rate differentials that are seen in the currencies of two different nations.  The Australian Dollar tends to be one of the countries associated with higher interest rate conditions as an economy that exports commodities (such as copper and metals).

If we see an investment scenario where this type of trend is likely to continue, the Reserve Bank of Australia could continue to raise interest rates and this would create significant carry value relative to currencies like the Japanese Yen which have had interest rates near zero for several decades.  Whenever long positions are being taken in forex pairs like the AUD/JPY the trader is able to capture the higher interest rate of the two pairs.  This is one of the reasons for why carry trades are one of the most common trades in the forex markets.

Of course, it will be up to the central bank members themselves to determine whether or not these trends will continue.  Higher interest rates generally mean higher currency values, so the valuation race here is really going to be determined by the interest rate threshold that will be seen in the US versus Australia.  There are strong arguments on both sides but it is increasingly looking as though major trends are developing that will influence the foreign exchange markets over the long-term.

 

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