Australia, a country that is the world’s largest exporter of iron ore and coal, couldn’t be more attached to the economic fortunes of its biggest trading partner, China. Recent data has indicated that China’s Manufacturing Purchasing Managers’ Index (PMI) rose to 50.1 in December. This marked uptick indicates a welcome turn toward more favorable economic conditions. This uptick in China’s economic health is expected to have significant implications for the Australian Dollar (AUD), particularly as it pertains to Australia’s largest export: iron ore.
Australia’s economy booms from the abundance of its natural resources. Iron ore is the engine of trade for the nation. Australia supplies a gigantic 62% of China’s iron ore imports. As this country has produced and consumed more of this vital commodity than any other country. With every tick of the clock, China’s growing economy builds a bigger thirst for raw materials, manufactured goods, and services that come from Australia. This inverse relationship starts a chain reaction on the value of the Australian Dollar.
Impact of China’s Economic Performance
The link between China’s economic performance and the AUD is long known. When China publicly releases positive growth data, it typically results in an appreciation of the AUD. At the time of writing, the AUD/USD is sitting around 0.6697, showing how much the currency has reacted to China’s news and shifting situation.
As the China’s economic boom continues, its demand for Australian exports grows. This increased demand means more purchasing power for the AUD, which forces its value up against other currencies. The resultant surplus demand from foreign consumers who want Australian exports all adds to the upward pressure on the Australian Dollar.
With China’s PMI topping 50.1 in December, it would signal further potential expansion in manufacturing activity. A PMI greater than 50 typically points to expansion in the industry. This rising economic activity typically leads to increased use of Australian resource commodities. This second scenario augurs much better for Australia’s trade balance and medium- to long-term economic health.
Factors Influencing the Australian Dollar
At the same time, the valuation of the Australian Dollar is heavily influenced by the pace of China’s economic growth. Many other factors strongly influence its ups and downs. Both domestically and internationally, inflation rates within Australia are highly anticipated by investors and traders. High inflation can erode purchasing power and influence monetary policy decisions made by the Reserve Bank of Australia (RBA), thereby impacting the AUD’s strength.
Australia’s growth rate is inversely related to its currency value. If the economy is growing, so too is confidence in the AUD. A strong trade balance, underpinned by strong export figures, gives the currency additional support.
The combination of these three components continues to make for a very volatile environment for the Aussie Dollar. Additionally, as China buys more from Australia, particularly of iron ore, this increases demand for the AUD. Foreign exchange traders lock deeply into the fine print of Australian economic statistics and Chinese growth metrics to anticipate the next swings in currency value.
Future Outlook
Analysts are looking forward, expecting that thanks to the start of a sustained post-COVID economic recovery in China, demand for Australian exports will keep rising. The relationship between these two economies is pivotal as China seeks to bolster its manufacturing capabilities and infrastructure projects. It will likely increase its imports from Australia.
The sharply increasing PMI number is a welcome development on both economic fronts. This implies that Australia would stand to benefit from more appreciation in its currency if China is on a constructive growth path. Doubts about the state of global markets and possible changes to domestic economic policy could threaten that outlook.