… the Australian dollar (AUD), which is sinking fast. On Monday’s Asian trading session it is now trading around 0.6645 against the USD. This decline is in reaction to discouraging economic news from China, Australia’s biggest trading partner. Australia’s inflation rate, economic outlook, and trade balance – including exports of natural resources – influence the value of the AUD. Consequently, it is very sensitive to the changes in the Chinese economy.
Analysts previously predicted a 2.9% jump in China’s retail sales for the month of November. In reality, growth came in at just 1.3%, well below expectations and further shaking confidence in the Australian dollar. As Australia’s economic landscape is heavily reliant on exports, particularly to China, the health of the Chinese economy significantly influences the AUD’s performance.
Resource Richness and Export Reliance
Australia is rich in natural resources. This wealth has helped turn it into one of the world’s largest exporters of raw materials, including iron ore, coal and natural gas. Iron ore stands out as Australia’s biggest export and serves as a crucial driver for the AUD’s value. When worldwide demand for iron ore increases, it increases the value of the currency. Often, foreign buyers quickly come in and buy up these highly prized commodities.
This heavy reliance on exports means there is an immediate connection between the AUD and what’s going on with China’s economy. A robust Chinese economy increases demand for Australian exports. Consequently, this creates an increased demand for the AUD. Even slight indications of weakness in the Chinese economy can result in an immediate negative impact on the Australian dollar.
Impact of Inflation and Trade Balance
High inflation levels within Australia means the Australian dollar loses value quicker than other currencies. When inflation increases, it digs into people’s purchasing power. This shift affects the policy choices taken by the RBA in regard to monetary policy. If there is a risk of persistent high inflation then this would lead to sharper interest rate increases, providing additional support for the AUD. Conversely, low inflation could be its undoing.
Moreover, Australia’s trade balance has an outsized effect on the AUD’s value. A positive net trade balance, which constitutes an export-driven surplus, should generally be bullish for the corresponding currency. Additionally, strong export performance has the potential to attract further foreign investment, further bolstering demand for the AUD. In particular, in recent months with rising – then falling – global commodity prices bringing onward volatility in trade balances, the AUD has bobbled about with these changing fundamentals.
Reactions to China’s Growth Data
Market reactions to China’s economic indicators usually have a strong and direct influence on all currency pairs that include the AUD. When there are positive surprises in China’s growth data, the AUD usually rallies as investors price in the prospect of stronger demand for Australian exports. Conversely, disappointment can be rapidly punished by a sudden drop in the currency’s value.
Last week’s China retail sales data was a huge miss. Consequently, traders are today looking at the potential economic impacts of the surprise outcome for Australia. The disappointing growth number fuels fears that Chinese consumers are losing confidence. This would greatly increase future demand for Australian resources.