What drives the AUD/USD exchange rate?
You would think that it’s a question that is fairly easy to answer yet conventional currency forecasters still have difficulty get their point forecasts right.
I’m not making excuses for these guys and gals in the punditry but I’ve always thought that there was a little bit of an “corrected” Heisenberg Principle at work here. That is, by observing, forecasting/building expectations and publicising them, we impact the end point. It’s one reason when I was doing the currency strategy thing I had price targets only. Trying to nail a price and time target is almost impossible once we get past about 3 months and anyway Heisenberg said we can’t know both velocity and position so its a moot point.
But back to the main reason for this blog. Their are a myriad of inputs for any currency but in general you can distil them into 4 or 5 key drivers. In the case of the AUD/USD rate the main drivers, both up and down are:
a. Global Growth and Commodity prices
b. Domestic growth and Interest rates
c. Global Risk Appetite/Aversion
d. Techincals and
e. The USD – the other side of the coin.
Which is the key or primary driver and how you weight these drivers changes both depending on conditions but also is directly related to the time frame being looked at. But in general this is all you need to know whether Day trading or hedging a corporate balance sheet.
Now of course some readers, and certainly professional FX advisors and pundits may say there is more to it than that. But believe it or not less is more.
James Montier in his “Little book of Behavioural Investing” shows us research that proves that more information doesn’t necessarily improve accuracy, just confidence. Sounds like market forecasters to me.
Over the next 5 Blogs we will spend some time examining these drivers in more detail and build a framework for evaluating what’s driving the AUD.