AUD – Australian Dollar

1. Currency Identity

The Australian dollar (aussie) is one of the most interesting currencies in the Forex market because it does not represent only the Australian economy. The AUD also incorporates China, Asia, commodities, the global cycle, risk appetite and rate expectations. In other words, it is often the meeting point between the real economy and financial sentiment.

From a technical perspective, Australia has adopted a free-floating exchange rate regime since 1983. This means that the value of the AUD is determined by the market, while the central bank (RBA) can intervene only in exceptional cases of financial disorder and not to defend a fixed exchange rate.

For the RBA, the flexible exchange rate is an important macroeconomic shock absorber because when commodity prices or the country’s terms of trade change, meaning the ratio between export prices and import prices, the AUD can move to absorb part of the shock.

This is particularly relevant for Australia, a country strongly linked to commodity exports — such as iron ore, coal, natural gas, gold and agricultural products — because if export prices rise relative to import prices, the terms of trade improve, Australia receives more value from foreign trade, national income increases and the AUD tends to receive support.

Conversely, if the prices of exported commodities fall or the cost of imports rises more rapidly, the terms of trade deteriorate, and in this scenario Australia receives less real value from international trade and the AUD tends to weaken.

This is precisely where the flexible exchange rate performs its role as a shock absorber: a weaker AUD can make exports more competitive and soften the negative impact of the shock on the domestic economy.

But who or what determines the depreciation of the AUD?

The market depreciates it.

More precisely, the AUD depreciates when, in the Forex market, selling pressure on the AUD increases relative to buying pressure. There is not necessarily a single actor that “decides” to depreciate it: it is the aggregate result of the decisions made by banks, funds, companies, investors, macro traders, importers, exporters and hedgers.

The mechanism is this: when Australian terms of trade deteriorate, the market expects lower export revenues, lower national income, a possible economic slowdown and perhaps a less restrictive RBA (dovish). At that point, many market participants reduce their exposure to Australia or sell AUD.

Concrete example:

• the price of iron ore falls;
• the market anticipates lower revenues for Australian exports;
• interest in Australian assets declines;
• funds and traders sell AUD;
• relative demand for USD, JPY or other currencies increases;
• AUD/USD falls.

So, when we say “AUD depreciation”, we mean:

a reduction in the value of the AUD generated by market forces, through net selling of Australian dollars and lower relative demand for the currency.

The RBA can indirectly influence the exchange rate through interest rates, communication, monetary policy expectations and forward guidance, but under a floating regime, as mentioned earlier, it does not “set” the value of the AUD. It intervenes directly only in exceptional conditions of market disorder.

This structure therefore makes the AUD a cyclical currency, not a defensive one.

• it tends to perform well when the world is growing, China is demanding raw materials, investors are seeking yield and markets are in risk-on mode;
• it suffers instead when fear rises, demand for the US dollar increases, financial tensions intensify or signs of a Chinese slowdown emerge, meaning during risk-off phases.

Its nature is dual: in addition to being the Australian currency, the AUD is a liquid proxy for the Asia-commodity-risk cycle. The market often uses it as a practical instrument to take an indirect position on Asian growth, commodity prices and global risk appetite.

• it is a proxy because it represents something broader than the Australian economy alone. When an investor buys AUD, they often express not only a view on Australia, but also on China, Asian commodity demand, iron ore and global risk appetite.
• it is liquid because the Australian dollar is a heavily traded currency in the Forex market: it allows funds, banks and macro traders to enter and exit positions with relative ease, without having to trade directly in less liquid or more complex assets.

In summary, buying AUD often means gaining exposure to a scenario of solid Asian growth, supported commodities and risk-on markets. Selling AUD, on the other hand, often means positioning for Asian slowdown, commodity weakness and rising risk aversion.

This is why the AUD is one of the most liquid instruments through which the market expresses a view on the Asia-commodity-risk cycle.

2. Operational CV

The RBA operates with a flexible inflation target between 2% and 3%, while the Monetary Policy Board takes decisions independently from the government. Monetary policy decisions are announced at 2:30 p.m. Sydney/Canberra time, which means the UTC equivalent changes depending on Australian daylight saving time.

In the FX market, AUD/USD remains the dominant pair in Australia’s foreign-exchange market: in 2025, it accounted for 41% of FX turnover in Australia.

3. Drivers and Catalysts

The first driver: China

The AUD must always be read with one eye on China. Not because Australia is mechanically “dependent” on Beijing, but because China is the main buyer of many Australian exports, especially commodities.

According to Australia’s Department of Foreign Affairs and Trade (DFAT), China was Australia’s largest two-way trading partner in 2024, with nearly AUD 312 billion in trade, and accounted for almost one-third of Australian exports. Exports to China are dominated by resources and energy, with iron ore, natural gas, and gold among the most important items.

Operationally, this means that when positive signals come from China — credit, industry, property, infrastructure, or steel demand — the AUD can benefit. When industrial weakness, property-sector stress, or disappointment around Chinese stimulus emerges, the AUD tends to lose traction.

The second driver: commodities and terms of trade

Australia is a developed economy, but its external structure remains heavily linked to natural resources. This makes the AUD highly sensitive to commodity prices, not perfectly day by day, but meaningfully over the medium term.

In the RBA’s Index of Commodity Prices basket (ICP), from 1 April 2026, iron ore weighs 30.9%, metallurgical coal 11.4%, thermal coal 8.5%, and LNG 16.3%. These figures explain why the AUD is often treated as a commodity currency.

The key is not to oversimplify. It is not enough to say “iron ore goes up, AUD goes up.” The exchange rate also reacts to the USD, the Fed, risk sentiment, yields, market positioning, and expectations around China. Still, when Australia’s commodity cycle improves together with Asian demand, the AUD usually has a structural tailwind.

The third driver: RBA versus Fed

AUD/USD is a pair where the real protagonist is often the differential between Australia and the United States. If the RBA becomes more restrictive while the Fed is perceived as closer to cuts or pauses, the AUD tends to find support. If, instead, the Fed remains more aggressive than the RBA, the US dollar can pressure AUD/USD even when Australian data is decent.

As of 6 May 2026, the RBA had lifted the cash rate to 4.35%, with a 25-basis-point increase aimed at containing inflation.

The market does not look only at the current level of rates, but above all at the expected path: further hikes, delayed cuts, persistent inflation, labour-market strength, wages, and consumption. The AUD can rise not because Australia’s situation is perfect, but because the market changes its view on the RBA relative to the Fed.

The fourth driver: risk-on and risk-off

The AUD is a high-beta currency. When investors search for yield, buy equities, sell protection, and accept more risk, the AUD tends to breathe better. When fear increases, capital usually flows back toward USD, JPY, CHF, and US Treasuries.

This feature is especially visible in AUD/JPY, one of the most widely used pairs as a risk-on/risk-off thermometer. If AUD/JPY rises, markets are often rewarding growth, yield, and risk appetite. If it falls sharply, it may signal de-risking, deleveraging, or demand for the yen.

AUD/USD, on the other hand, is more contaminated by the US dollar. The AUD may have good reasons to strengthen, but AUD/USD can remain weak if the US dollar is dominating the entire market.

The fifth driver: external balance and income flows

Australia should not be analysed only through commodity exports. The income balance also matters: how much the country pays or receives on investments, profits, interest, and foreign capital.

In the latest available ABS data, Australia’s current account in Q4 2025 recorded a deficit of AUD 21.1 billion. The goods and services balance remained positive, but the primary income deficit widened to AUD 21.7 billion, weighing on the overall balance.

This matters because it prevents a naïve reading: exporting many commodities does not automatically mean having a strong currency at all times. One must also consider repatriated profits, financial flows, foreign investment, yields, and the global capital cycle.

4. Decision-Making Compass

AUD-supportive scenario

The AUD tends to be supported when several elements align:

• China improves;
• industrial commodities strengthen;
• iron ore is stable or rising;
• risk sentiment is positive;
• global equities are constructive;
• the RBA is more hawkish than expected;
• the Fed becomes less aggressive;
• Australian yields become relatively more attractive;
• labour, wage, or inflation data reduces the probability of RBA cuts.

The ideal environment for AUD is a world where growth is not too weak, Australian inflation remains persistent enough to keep the RBA alert, but not so high that it creates financial panic. This is the classic environment in which markets search for yield and buy cyclical currencies.

AUD-negative scenario

The AUD tends to suffer when the following appear:

• global risk-off;
• strong US dollar;
• rising US Treasury yields due to restrictive repricing;
• weak China;
• falling iron ore, coal, or LNG;
• disappointment around Chinese stimulus;
• a more dovish RBA;
• deterioration in the Australian labour market;
• equity sell-off;
• rising global volatility.

The key point is that the AUD can fall even without bad Australian news. A wave of USD strength, a violent equity correction, or a negative signal from China can be enough.

Practical reading by pair

AUD/USD
This is the main pair. It should be read through three blocks: Australia, China/commodities, and the US dollar. If the AUD rises against many currencies but not against the USD, the problem is probably the dollar, not Australia.

AUD/JPY
This is the most risk-sensitive pair. When it rises, markets are often rewarding carry, growth, and risk appetite. When it collapses, pay attention: it may signal global risk reduction.

EUR/AUD
This pair compares a more industrial euro area, shaped by the ECB cycle, with a currency linked to Asia and commodities. If China and commodities improve while Europe slows, EUR/AUD may weaken.

GBP/AUD
This is a more nervous pair because it combines two currencies exposed to different forces: the UK, BoE, British inflation, and domestic sentiment on one side; China, commodities, and the RBA on the other. It can move sharply when the two macro blocs diverge.

AUD/NZD
This is the most “local” comparison. Here, the key factors are RBA versus RBNZ, rate differentials, labour and inflation data, and the difference between Australia’s structure, more linked to minerals and energy, and New Zealand’s structure, more agricultural and domestic.

5. Operating Windows — UTC 0

This section is crucial because the AUD often moves when many European traders are not yet fully active.

Asian window

The most natural window for the AUD is the Asian session. This is when many Australian and Chinese data releases come out, and when the first directional move of the day often forms.

Indicatively:

The ABS specifies that its release calendars are in Canberra time, so for trading purposes it is always better to convert the time into UTC depending on the period of the year.

London

The European session is important because it adds liquidity. London often decides whether to confirm the Asian move or absorb it. If the AUD moves strongly during the European night, the London open can bring continuation, profit-taking, or a false breakout.

For AUD/USD, London is often the moment when the Asian move meets the first real global flow.

New York

The US session is decisive especially for AUD/USD. From that point onward, the focus often shifts to:

• DXY;
• Treasury yields;
• US data;
• Fed expectations;
• Wall Street;
• global risk sentiment.

An Australian data release can set the initial direction, but a US CPI, NFP, or violent Treasury move can completely reverse AUD/USD.

6. Connected Asset Dashboard

To read the AUD properly, looking only at the currency chart is not enough. You need a small mental dashboard.

Commodities

Iron ore
This is the main reference. Australia is heavily exposed to the iron ore cycle, and China is a major buyer. If iron ore rises together with positive signals from China, the signal for AUD is cleaner.

LNG
Important for exports and terms of trade. It is more connected to the global energy cycle and Asian contracts.

Metallurgical and thermal coal
Relevant for exports and the industrial cycle. Metallurgical coal is more closely linked to steel and industry.

Gold
Australia is a major gold exporter. However, gold has a dual nature: it can support Australia’s external revenues, but if it rises because of extreme fear, it does not always support the AUD, because in risk-off conditions the market may prefer USD, CHF, or JPY.

Copper
It is not at the core of Australian exports like iron ore, but it is an excellent barometer of global industrial demand. If copper and AUD diverge, it is worth asking which one is better anticipating the cycle.

China and Asia

USD/CNH and USD/CNY
If the yuan weakens, it often signals stress in China or pressure from a strong dollar. This can weigh on the AUD.

CSI 300 / Hang Seng
Useful for reading China and Asia sentiment. They are not perfect, but they help understand whether markets are buying or selling Chinese risk.

Chinese data
PMIs, industrial production, retail sales, credit, property, trade balance, and fiscal or monetary stimulus are all important inputs for the AUD.

Rates and bonds

AU 2Y / AU 10Y
Useful for reading what markets are pricing about the RBA.

US 2Y / US 10Y
Essential for AUD/USD. If US yields rise because markets reprice a more restrictive Fed, AUD/USD can suffer even with good Australian data.

AU-US differential
One of the best filters. It is not enough to look at the RBA cash rate; the expected yield differential versus the United States must also be monitored.

Risk sentiment

S&P 500 / Nasdaq
If US equities rise with low volatility, the AUD tends to have more room. If equities sell off aggressively, the AUD can become vulnerable.

VIX
A rising VIX signals higher demand for protection. Generally, that is not friendly for the AUD.

AUD/JPY
Probably the best synthetic thermometer. When AUD/JPY confirms AUD/USD, the move is more credible. When they diverge, it is necessary to understand whether the dominant force is the USD or risk sentiment.

Final Summary

The AUD should be read as a barometer of the global cycle. It is not merely a domestic currency, and it is not a pure commodity currency either. It is a combination of five forces:

China + commodities + RBA + Fed + risk sentiment.

When these forces point in the same direction, the AUD can move decisively. When they diverge, it becomes a currency full of false signals: commodities may rise, but the US dollar may dominate; China may improve, but the market may be in risk-off mode; the RBA may be restrictive, but the Fed may be even more so.

The practical rule is this: before judging the AUD, identify which engine is driving the move. If it is China, watch iron ore, the yuan, and Asian equities. If it is the RBA, watch Australian yields and inflation/labour data. If it is the dollar, watch DXY and Treasuries. If it is risk sentiment, watch AUD/JPY, equities, and volatility.

Only then does the AUD stop looking like a “moody” currency and become what it really is: one of the best liquid lenses through which to observe the relationship between Asia, commodities, and global risk appetite.