The Australian Dollar (AUD) AUDUSD is at an interesting crossroads. Recent trade data reveals promising trends that could help shape its future. The most recent trade figures, published in early October, show a AUD 4,385 million widening of the monthly trade surplus. That increase would have a powerful effect on the value of the currency. Thus, the health of the Chinese economy has an outsize influence on the AUD. This is, in large part, due to the fact that China is Australia’s biggest trading partner. This relationship highlights the non-monetary ways that changes in Chinese economic performance directly influence the value of the AUD.
The better than expected data revealed a widening trade surplus, marking a 3.4% beat higher increase in Australian exports. Imports increased as well, up 2.0% in October. Australia has never produced more highly-sought after iron ore exports. Consequently, the AUD/USD pair is enjoying a modest advance of 0.12%, at 0.6609. Ongoing inflation and growth rate issues in Australia could create risks. All these factors will determine how strong or weak the Australian Dollar performs going forward.
Trade Balance and Economic Indicators
The merchandise trade balance in particular is an important barometer of the economic relationship between Australia and its key trading partners and normally China tops the list. As the largest consumer of Australian goods, fluctuations in Chinese demand can have a direct impact on the AUD’s valuation. The recent increase in exports indicates a strong demand for Australia’s resources, including iron ore, which is pivotal for the economy. Iron ore is not only Australia’s biggest export, its prices are the most important worldwide indicator followed by investors and economists.
Additionally, the new trade data is a tremendous reminder that, despite exports posting a remarkable month-over-month growth, so too did imports. The fact that imports are up 2.0% shows that domestic demand is robust. This trend is a testament to our economy’s resilience. This duality creates a somewhat misleading portrait for policymakers as they attempt to equalize the playing field of trade.
Another major contributing factor to the strength of the AUD is inflationary pressures currently occurring in Australia. When inflation grows too high, it has the potential to steal away purchasing power and stifle economic activity. The Reserve Bank of Australia will have to tread these economic waters lightly in order to keep confidence in the currency and avoid further runaway depreciation.
Influences on the Australian Dollar
This overdue market correction does not mean that the Australian trade story is over—quite the opposite. The wider economic climate, such as Australia’s growth rate and inflation rates, are important factors that play an indispensable role in the country’s currency value. A solid growth rate would usually send the AUD higher. Such robust growth is a sign of a strong economy able to support more robust export activity.
Today’s unexpected trade surplus may provide the AUD some temporary relief. If inflation is persistently higher than anticipated or growth deteriorates in a surprise negative turn, the currency could come under pressure. Market analysts have become hyper-sensitive to potential drops in value. If those losses continue, they are expecting the AUD to drop to the 100-day Exponential Moving Average (EMA) at 0.6514.
From a technical perspective there are some major support hangouts with prior bottoms. October 10 low at 0.6472 likely will emerge as new pivot point for traders. They will monitor very carefully for any indication that the AUD’s performance is stabilizing.
Future Prospects for AUD/USD
The upcoming weeks will be critical for stakeholders monitoring the AUD/USD pair as market sentiments shift based on upcoming economic data and global developments. For all the anxieties of today, this week’s trade data paint a picture of stabilization and progress. That said, global market conditions as well as China’s economic performance is key to long-term forecasts.