The Australian Dollar (AUD) is recovering from its morning defeat. This recovery is not driven by stronger domestic demand, but rather a soaring demand from overseas purchasers who can’t get enough of Australian exports. This flood of attention pours in, despite the fact that the country is still navigating some confusing employment data. Australia’s economy remains intricately linked with that of China, its largest trading partner, influencing the AUD’s value in significant ways.
This week’s Australian labour force figures showed Australia created 14.9 thousand new jobs compared to an expected increase of 17. This stands in sharp contrast to the nationwide trend of laying off August 11,800 employees. Those disappointing figures certainly don’t outweigh the continued very strong demand for Australian goods and services. Looking at the other major driver of the performance of the AUD, China has been in the headlines a lot recently.
The Impact of China’s Economy on the Australian Dollar
China’s economy is the most important fundamental for the value of the AUD. When China’s economic indicators show strength, it typically results in increased purchases of raw materials and other goods from Australia. The increase in demand for Australian exports creates upward pressure on the value of the AUD. This increase is a good sign indicating a robust and booming U.S.-China trade relationship.
Australia is a resource-rich country, containing huge reserves of a range of minerals and commodities, with iron ore as its biggest export. Because Australia is the largest exporter of iron ore, price fluctuations in iron ore directly influence the AUD’s performance. China’s rampant demand for these resources is pushing prices sky-high. Consequently, the AUD appreciates as foreign buyers scramble to get in on what Australia has to offer.
On the flip side, any negative surprises from the growth data in China will, in turn, have an almost instant negative impact on the AUD. Thus, investors around the world closely monitor every key economic indicator that comes out of China. So, any indications of a slowdown would lower global demand for Australian exports and knock the currency down. Given the above, the health of China’s economy is the top concern for short-sellers and analysts.
Domestic Factors Influencing the Australian Dollar
Today the AUD remains captive to external factors, which exert an enormous influence on the AUD’s value. Equally important in determining its ups and downs are domestic economic conditions. High inflation rates across Australia increasingly impact consumer spending and the state of the overall economy. By impacting purchasing power, inflation can shift investor sentiment about the AUD.
Fourthly, Australia’s growth rate, which is one of the key fundamental factors that affects a country’s currency. A high growth rate indicates a good economy which is able to lure in more foreign investitures. Conversely, when growth is slow, confidence in the AUD can dry up. Analysts routinely look at GDP growth data and employment numbers side by side. This technique allows them to forecast general economic conditions and their effects on currency stability.
Australia’s trade balance is a key pillar of its positive economic fortunes. A trade surplus means that the country’s exports are greater than its imports, increasing demand for the Australian Dollar. This situation should be a particular cause of concern given Australia’s extreme dependence on exports to support both its economy and currency value.
Current Market Context
The US Dollar Index (DXY) is currently holding around its weekly low near the 98.50 level. This new factor injects still greater uncertainty and risk into currency trading. In general, a weaker US Dollar should correlate with stronger performance of other currencies – including the AUD. As the market continues to look for opportunities across currency pairs, a weaker DXY will likely bring more buyers into the Australian Dollar.
The complex improve of local job data and international economic developments still dominate the world on their impact on the AUD. Therefore, Australia continues to struggle creating jobs, but the still robust international demand for its resources is a strong countervailing force. This dual influence highlights the need to consider both local and global economic indicators when trying to understand currency movements.