Forex Market in Australia

Currency: Australian Dollar
Common Name: Aussie
Quotation Convention: 4 decimal points
Most liquid cross: AUD/USD
Average Bid/Offer: 5 pips (0.6800 / 0.6805)
1 pip: 0.0001 USD
Settlement: Transaction plus two days (T+2)

Economic Indicators for Australia

• Balance of goods and services
  
• Consumer Price Inflation (CPI)
  
• Gross Domestic Product (GDP)
  
• Private Consumption
  
• Producer Price Index (PPI)
  

Economic Overview

In recent decades, Australia has developed into an internationally competitive, advanced market economy. Although its 2005 GDP of US$642.7bln is relatively small compared to other industrial Western European countries, Australia's per capita GDP of $32,000 is comparable to that of other major Western European economies.
Australia has a service-oriented economy, with about 70 percent of its GDP coming from finance, property and business services. Australia's emphasis on economic reforms, low inflation, and trade with China are other key factors that have led to the economy's increased strength. However, the country has one of the largest trade deficits in the world at US$16.6bln, due in part to drought, weak foreign demand and strong import demand. The country has a national deficit of $509.6bln. The rapid increase in domestic housing prices was a previous concern for the Australian economy, but prices appear to have peaked in 2005, easing speculation that interest rates will skyrocket to prevent a speculative bubble.
Major exports include coal, gold, aluminum, iron ore and wheat. Major imports include machinery and transport equipment, computers and office machines, and telecommunication equipment and parts. Australia's main trade partners are the U.S., China and Japan.

Economic Policy Makers and Tools
The Reserve Bank of Australia (RBA) is responsible for determining and implementing monetary policy. The Reserve Bank Board makes policy decisions to achieve the goals of low and stable inflation, financial system stability, and safety and efficiency of the payments system. The Board meets 11 times per year, on the first Tuesday of each month except January. Economic developments and recommendations are discussed, and interest rate or other economic policy decisions are publicly announced the next day.
The Bank's Domestic Markets Department maintains conditions in the money market to keep the cash rate at or near an operating target set by the Board. The cash rate is the rate charged on overnight loans between financial institutions. It influences other interest rates, and acts as the basis for the economy's interest rate structure. Changes in monetary policy lead to a change in the operating target for the cash rate, which results in changes in the current interest rate structure.
The RBA uses open market operations to influence the cash rate. The goal of the RBA's open market operations is to keep the cash rate close to the target rate by managing the supply of funds available to financial institutions. The Reserve Bank of Australia's open market operations are conducted through repurchase agreements and outright transactions in short-term Commonwealth Government Securities (CGS). When the Reserve Bank purchases CGSs, it pays for them by crediting the exchange settlement (ES) account of the seller (or its bank), which increases the supply of ES funds. The supply of ES funds is decreased when the RBA purchases CGSs. By using short-term instruments to conduct its operations, the Reserve Bank of Australia limits interest rate risk.
The RBA may conduct foreign exchange market operations when the market threatens to become excessively volatile, or when the exchange rate is inconsistent with underlying economic fundamentals. The RBA sets a trade-weighted index (TWI), which is the weighted average value of the Australian dollar in relation to the currencies of the country's major trading partners. This index level is published each day at 9 a.m., noon and 4 p.m. The TWI, along with the cross-rate with the United States dollar (USD), is monitored and the RBA can intervene to stabilize market conditions if it is deemed necessary.

Characteristics and Trends
Because Australia is the third largest producer of gold in the world, the Australian dollar appreciates when commodity prices increase, and depreciates when commodity prices decrease.
Because the country's economy is largely based on commodities, Australia's GDP is sensitive to severe weather conditions such as droughts and storms that can affect agriculture and other related industries.
Because of Australia's high interest rates, the Australian dollar is one of the most popular currencies to buy for carry trades. An example of a currency carry trade is borrowing $1,000 AUD from an Australian bank, exchanging the funds into U.S. dollars, and buying a bond for the equivalent amount. Assuming that the bond pays more than the amount owed to the bank for borrowing the funds and the exchange rate does not move adversely, such a trade can be profitable.
Interest rate differentials between Australian cash rates and short-term yields of other industrialized nations are watched as indicators of potential currency movements.