The Australian Dollar (AUD) is highly correlated to the economic fortunes of China. This is largely due to the fact that China is Australia’s largest trading partner by a wide margin. As the unclear march in China’s growth data continues, AUD will be first in line to react. Particularly, the Reserve Bank of Australia’s (RBA) interest rates, inflation levels, and Australia’s trade balance play significant roles in shaping the currency’s trajectory.
For investors and analysts, being able to read and understand the prevailing dynamics between the Australian economy and China is critical. Recent trends indicate that positive surprises in Chinese economic growth data tend to bolster the AUD, while negative reports could lead to declines. Moreover, significant exports like iron ore further complicate the currency’s value, creating a multi-faceted relationship influenced by both nations’ economic conditions.
The Interdependence of Australia and China
Similarly, Australia’s economic landscape is deeply impacted by its trade relationship with China. As China is Australia’s biggest trading partner, any changes to China’s demand can have a direct effect on the value of the AUD. When China increases its appetite for primary commodities such as iron ore, it generates a significant increase in demand. This increase in demand raises the price of the AUD.
Should key Chinese economic indicators point to a contraction or significantly reduced growth, demand for Australian exports may diminish. Such a scenario would be devastating to Australia’s economy. Consequently, the AUD may depreciate, mirroring market sentiment shaped by the economic conditions in its biggest trading partner. This means that investors and other stakeholders have to be especially attuned to the release of key Chinese economic data to anticipate their impact on the AUD.
The RBA’s monetary policy decisions play a pivotal role in determining the AUD’s strength. The RBA sets the official cash rate to influence the rate of inflation, and thereby the rate of economic growth, in Australia. This, in turn, affects the volatility of that currency. We know from experience that lower interest rates can pour gasoline on the inflationary fire. This, in turn, can gradually undermine the AUD’s purchasing power against other currencies.
Key Influences on AUD Valuation
Many factors influence the rising and falling value of the Australian Dollar. High costs One of the biggest is interest rates. Because rising interest rates lead to an inflow of foreign investment, the RBA’s interest rate decisions are an important part of domestic inflation management policy. If higher interest rates do succeed in attracting the foreign capital we need, automatically the AUD appreciates in value because of the increased demand.
Additionally, Australia’s trade balance is another critical element in determining the AUD’s value. A trade surplus is when a country’s exports are greater than its imports. This dynamic strengthens the currency as buyers abroad require more AUD to acquire Australian exports. Conversely, a trade deficit tends to deteriorate the currency. This occurs, of course, because it essentially means that Australia is bringing in more merchandise than it is sending out.
Iron ore prices directly affect the AUD. On a national scale, iron ore is currently Australia’s most valuable export (PDF). Volatility in its prices can have a significant effect on income for Australian growers. If global demand for iron ore rises—especially from China—the resulting increase in exports can bolster the value of the AUD.
Market Resistance Levels and Future Outlook
Given the prevailing market climate, analysts have been able to pinpoint important resistance levels for AUD/USD. The major first upside barrier is seen at the 100-day Exponential Moving Average (EMA) now at 0.6525. If the AUD is able to break above this level it could face additional resistance at the September 1st high of 0.6560.
Should market conditions lead to extended losses for the AUD, the currency may descend toward major support floors. This decrease would represent a big deal, both in scale and in substance. Today’s October 10, 0.6472 low will provide buyers with an important sense of comfort. Should the currency keep depreciating, it could target the July 31 low of 0.6424 and approach the psychological mark of 0.6400.
Investors are right to be watchful when it comes to next important economic shows from China and, needless to say, Australia. Chinese growth rate reports and Australian inflation rate reports, whose impact on market sentiment we previously discussed. They might even shape market trading decisions affecting the AUD.