Aussie fixing tops 0.7000 ahead of jobs data: what lot size means

The Australian dollar was the standout in Wednesday's official fixings. The European Central Bank's AUD/USD reference rate for 14 October rose 0.46% to 0.7010, up from 0.6978 on 13 October, as traders looked ahead to Australian jobs data that could keep Reserve Bank of Australia (RBA) hike bets alive.

The wider picture is a strong US dollar. After the hot US inflation report we covered this afternoon, Investing.com reports the dollar firmed to near an 18-month high as an October Fed hike came back into play. The investingLive Americas wrap says the dollar led and sterling lagged, Fed's Goolsbee called the CPI data discouraging, and the Beige Book showed price pressures broadening. Our sister site has more on Goolsbee and the Beige Book after the hot CPI. Keep in mind that a fixing is one daily snapshot, so it does not show every move later in the day.

For the Aussie, the next test is local. According to investingLive's jobs preview, NAB, Westpac and consensus all expect 20,000 new jobs, with unemployment seen at 4.6%. investingLive says a drop to 4.5% would revive the case for more RBA tightening and could support the Australian dollar, while a rise to 4.7% would push the other way. You can follow the pair on a AUD/USD chart.

What is lot size?

A lot is a standard trade size in forex. Instead of buying "some" Australian dollars, traders deal in fixed blocks of the base currency, which is the first currency in a pair. In AUD/USD the base is the Australian dollar and the quote currency is the US dollar.

The common sizes are:

• Standard lot: 100,000 units of the base currency
• Mini lot: 10,000 units
• Micro lot: 1,000 units

Lot size decides how much money each move in the price is worth. The same price change can mean a few dollars or a few hundred dollars, depending only on the size of the position. Brokers can differ in the sizes they offer, so always check the contract details.

A worked example

Let us use the two ECB fixings. AUD/USD went from 0.6978 to 0.7010.

The change is 0.7010 minus 0.6978, which equals 0.0032 US dollars per Australian dollar. Because profit or loss in this pair is counted in the quote currency, the result is in US dollars.

Now stretch the window. Five fixings ago, on 8 October, AUD/USD was 0.6943. From 0.6943 to 0.7010 is a change of 0.0067. On one standard lot that is 100,000 × 0.0067 = $670. On one micro lot it is 1,000 × 0.0067 = $6.70.

The arithmetic works in both directions. Someone holding the opposite position over the same period would have lost these amounts instead of gaining them. These figures are for illustration only, using reference rates rather than prices anyone actually traded at.

Why it matters for new traders

Lot size is the main way you control risk. A 0.46% move sounds small, yet on a standard lot it was worth $320 in a single day. Events like tomorrow's Australian jobs report can move a pair quickly, so the size of the position matters more than the direction you picked.

Many beginners start with micro lots so that each move is worth only a few dollars while they learn. It also helps to work out the value of a move before opening a trade, not after. Ask: if the price moves against me by this much, what would it cost in my account currency?

Key terms

• Lot: a standard block of the base currency used to size a trade.
• Base currency: the first currency in a pair, the one you buy or sell.
• Quote currency: the second currency, in which the price and the profit or loss are shown.
• Reference rate (fixing): an official daily rate, such as the ECB's, not a live tradable price.
• RBA: the Reserve Bank of Australia, the country's central bank.