The Australian Dollar (AUD) has come under significant pressure at the moment. China’s economic indicators reinforce the nuanced love-hate dichotomy present in the Australia-China relationship. China’s economic health significantly influences the value of the AUD, given that China is Australia’s largest trading partner. According to a new data release, China’s Manufacturing PMI fell below 50 this past October. This decline is worrying enough, but its negative effect on Australia’s economy and currency should not be understated.
The relationship between Australia and China runs deep. China has remained Australia’s biggest trading partner. As a result, the health of the Chinese economy is key to the fortunes of many Australian exports – particularly those from mining and agriculture. When China does well, it tends to buy more of the things that Australia sells, which is good for the AUD. Negative trends, such as the recent decline in manufacturing activity, can lead to a decrease in demand for Australian exports, weakening the currency.
The Influence of China’s Economic Health
And, unsurprisingly given Australia’s commodity dependence, China’s economic performance has a major say over whether the AUD is strong or weak. Just a week ago, reports touted booming China growth. As a consequence, Australian businesses—critically drivers of their economy—benefit from high demand for their exports, particularly raw materials such as iron ore. As a result, this boosts the value of the AUD as demand for it increases.
On the flip side, any negative surprises in China’s economic data tend to weigh heavily on the Australian Dollar. Falling readings for leading indicators like the PMI suggest future deceleration in manufacturing and industrial production. China’s latest PMI came in at 49, creating fear flags among market analysts. They argue that this decline will reduce demand for Australian exports, increasing the downward pressure on the AUD.
Moreover, Australia’s growth rate and inflation play critical roles in shaping the currency’s value. Further, high inflation risks eroding domestic purchasing power and darkening the economic outlook, deterring investor confidence in the AUD. Correspondingly, changes in Australia’s trade balance—measured by its exports subtracted from its imports—impacts the strength of the currency as well.
The Role of Key Exports
Iron ore is still Australia’s largest export and economic mainstay. Its price directly affects the AUD’s performance. Since 2014, China has imported more than a billion tons of iron ore annually. As a result, any change in its economic condition immediately impacts the demand and value of this critical resource.
When China’s economy is robust, it tends to purchase more iron ore and other raw materials from Australia, boosting export values. This increased demand for iron ore would normally push the AUD upward. And now, at the end of June, China’s manufacturing sector is beginning to crack under that very strain. This puts into serious doubt its ability to future-proof the Australian goods movement booming demand.
Market realities These same dynamics are currently at play on global markets. As of writing, the AUD/USD pair is at about 0.6555. This number indicates that the AUD should depreciate. This is primarily due to declining demand from China, as reflected in the latest PMI report.
Impacts of Economic Indicators on Currency Value
Australia’s economic indicators are highly correlated with the AUD’s value. Factors such as inflation rates and economic growth directly influence how investors perceive the stability and attractiveness of the currency. If inflation continues to climb in Australia without productivity growth to match it would likely cause the AUD to depreciate.
Australia’s trade balance is perhaps the most commonly watched metric by investors. This trade surplus would typically result in upward pressure on the AUD. That’s because Australia is exporting more things to the rest of the world than we import from it. On the flip side, a trade deficit may lead to currency depreciation by indicating a decrease in foreign demand for Australian exports.