The Australian Dollar has undergone a wild roller-coaster ride this past year, trampled by an economic stampede of factors both at home and abroad. Australia has some of the best and richest natural resources in the whole world. It is very dependent on exports, with iron ore its dominant export commodity. The health of China’s economy significantly impacts the Australian Dollar, given that China is Australia’s largest trading partner. Thus, especially for the world’s two largest national economies, economic data conditions help lead much of the currency valuation process.
Australia’s inflation rate Another extremely important factor to Australia’s currency value. An outsized inflation surprise would likely trigger second-round expectations of an RBA rate rise. CPI data coming in below expectations would help temper those hawkish forecasts. In addition, both Australia’s domestic growth rate and its trade balance are key indicators that drive currency strength.
The Impact of China’s Economy
This is because these factors impact on Australian exports, and ultimately, the value of the Australian Dollar. When China’s economy is strong, it often buys more resources from Australia, boosting demand for the AUD. When China’s growth data is a miss or indicates a downturn, potential negative surprises are magnified. Such surprises can cause upward movement in the value of the Australian Dollar to the downside.
Australia is by far the biggest exporter of iron ore to China. When demand is threatened to change from China, it sends shockwaves across the Australian economy. Given the resource-rich nation’s deep dependence on this trading relationship, it has become vital to keep a watchful eye on China’s economic indicators. Prosperity in China’s economy almost always means more purchasing power and a correspondingly stronger AUD.
Along with direct trade impacts, foreign buyers’ interest in Australia’s exports also affects the currency’s value. For Australia, when our resources are in extraordinary demand or short supply, it increases our ability to negotiate in the international market. This impressive footing has naturally translated into a much stronger AUD exchange rate.
Domestic Economic Indicators
Australia’s domestic economic indicators are crucial in shaping the strength of its currency. This is a considerably stronger position than the RBA’s typical stance in monetary policy meetings. This indicates that further interest rate increases might be considered if inflation stays persistently high. This market stance forms investor sentiment into an immediate expectation concerning any potential, future appreciation of the Australian Dollar.
When CPI data comes in slower than projected, surprise can inject volatility into those forward expectations. If inflation doesn’t materialise, as their own forecasts suggest it should not, the RBA should reconsider its interest rate path. Second, it would place immediate downward pressure on the AUD. Investors carefully review these economic reports to try and get ahead of the next big move in the currency market.
Another important factor affecting currency valuation is Australia’s growth rate and trade balance. A booming positive trade balance is a sign that Australia exports much more than it imports, thus strengthening demand for the AUD. A negative trade balance is bad for its value. It means that more currency is exiting the economy than is entering.
External Influences and Global Economic Data
The AUD/USD exchange rate is heavily influenced by external economic data, especially from the United States. Major releases such as Employment Change and ISM Services PMI data continue to give us important indicators about the state of the US economy. These reports are misleading and create volatility in the AUD. A healthier US economy means more demand from overseas, which can draw foreign investment away from Australia and reduce demand for the Aussie dollar.
The growing interdependence of global economies makes it clear that events in one part of the world can have far-reaching consequences elsewhere. As such, financial analysts and investors carefully observe the latest US economic indicators to judge how they might impact the Australian Dollar.
Australia’s economic dependence on resources leaves it vulnerable to fluctuations in global commodity prices. These changes can have a dramatic effect on the nation’s trade deficit and the strength of its currency. For instance, rising iron ore prices can enhance Australia’s export revenues, positively affecting the AUD’s value.