Analyzing the Australian Dollar: Up, Down, and Under (ETF: EWA)

| About: iShares MSCI (EWA)

From the outside world, trading in the arcane foreign exchange markets might appear to be quite glamorous. However, attempting to make a living in the sleepless FX market can often become injurious to one’s mental health or pocketbook, as schizophrenia often seems to be the rule of the day. Yet for all the daily madness surrounding the FX market, when staring at the weekly price charts for the Euro, yen, pound or Aussie dollar, the outside observer will also notice methodical and established trends that can last for months or years.

While trading in the Australian dollar might not be a glamorous as dealing in the Euro, British pound, or Japanese yen, it is a most fascinating currency because of its historical relationship to gold and the broad commodities markets. From 2002 to late 2005, the Aussie dollar displayed an amazing 96% degree of correlation to the direction of the US gold price. For the 12-months ended June 2005, the Aussie traded with an 82% degree of correlation with the price of copper.

The Australian dollar is the fifth-most-actively traded currency in foreign exchange markets today, behind the US dollar, Euro, Japanese yen, and British pound, accounting for 5.5% of the volume in the $1.9 trillion dollar per day market. The Aussie dollar is popular with currency traders due to a relative lack of central bank intervention, the general stability of the economy and government, and it lends greater exposure to Asian economies and the commodity super cycle.

But in order to trade the Australian dollar successfully, it is helpful to know about its history, some basic economic fundamentals, the role of interest rate differentials, and trader psychology surrounding the currency.

In 1983, Canberra abandoned its managed peg for the Aussie dollar, which was tied to a basket of foreign currencies, and opted to float the currency in the open market. Within 2-years however, the Aussie dollar suffered a massive 30% devaluation before finding some stability near 70 US-cents in 1985. But throughout its 23-year history as a “free floater

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