The EUR/AUD pair is quite contradictory, but in the conditions of the modern economy, it can become a real find for traders who prefer transactions with risk above the average and good margin. To understand this topic, you need to understand what the strength of the Australian dollar depends on.
This is important because, together with the euro, it is the AUD that looks like a more promising object for analysis. The EU currency is not tied to any factors other than banking manipulations, therefore, against the background of the vulnerable Australian dollar, it looks more stable.
The main factor behind the change in the value of AUD is the difference in interest rates. This is the relative benefit that an investor receives from investing in the assets of one country compared to another.
For example, if the interest rate in Australia is 1.50% and in the EU 2.40%, an investor can make big profits by buying assets in Europe. This leads to lower AUD costs, as investors sell AUD and buy euros.
Historically, AUD has followed Australia’s main commodity export prices and the country’s general terms of trade. This is because Australian trading partners also need to buy AUD and sell their local currency to complete the transaction to purchase Australian exports.
The trend can be visible in that iron ore prices reinforce the strength and weakness of AUD for several decades due to the increase and decrease in the Chinese demand.
An Australian government credit rating may have a minor effect on AUD. This is because Australia’s credit rating affects the risk profile of its debt, which directly affects the cost that the government must pay for the debt it owes.
A poor credit rating makes buying a country’s debt riskier and less attractive, which reduces the overall demand for its currency.
Although this is not a problem in recent history, as the Australian government has maintained its AAA credit rating for over 15 years, events that have threatened this status have led to short-term AUD weakness in the past.
How to trade
The Australian dollar is one of the five most traded Forex currencies. There are several reasons for this, but the most probable one – AUD is an indicator of growth and risk in global financial markets.
It is often used as a barometer and trading device to capitalize on short-term mood changes in relation to global economic growth and market risk.
This is partly due to the fundamental fact that the Australian economy, being a “commodity currency”, is highly susceptible to changes in world economic activity.
Therefore, when a good mood prevails in the market, AUD often rises, and if pessimism prevails, AUD falls. Paired with the euro, the same picture is observed.
As an example, we can consider the situation with the exchange rate for 2019. In January, 0.65 euros were given for 1 AUD, but with an increase in turnover in the US trade war, the Australian dollar against the euro weakened and by July fell to 0.61 EUR for 1 AUD.
It is often said that AUD “rises on the escalator and falls down the elevator shaft.” This means that when the AUD grows, it does it gradually, but it falls suddenly. The statement is fully confirmed by the curve on the exchange rate graph over the past 5 years.
As a result, trading with the Australian dollar is considered relatively risky, especially compared to the main G4 counterparts. In the EUR/AUD pair, this is especially evident, since the euro is also prone to sharp jumps and drops.
Nevertheless, AUD is a highly liquid currency, which means that for those who have the appropriate risk appetite, AUD trading can provide the trader with ample opportunity to speculate on changes in global financial markets.