The Australian Dollar (AUD) faces a very tough road. It responds to a combination of both lagging and leading domestic and international economic data. China’s recent inflation figures, coupled with its economic performance, heavily influence the Australian currency due to Australia’s status as a resource-rich nation and its reliance on exports, particularly iron ore. When Australia’s largest trading partner, China, begins to send mixed economic signals, the potential consequences for the AUD are major.
Iron ore is Australia’s biggest export and essential to the country’s economic prosperity. Therefore, this commodity’s price has a direct impact on the value of the AUD. When demand starts rising, just as quick the currency builds momentum as the strongest fiat. When foreign buyers buy more Australian exports it provides surplus demand that can bid up the price of the AUD. So Chinese economic health is a major determinant of these dynamics.
Impact of Chinese Economic Data
China’s recent economic data is painting a mixed picture, which could put further downside risks to the AUD. CPI was up 0.7% y/y in November, right in line with consensus. Over the same stretch, the Producer Price Index (PPI) fell 2.2% YOY. This decrease is an indicator of growing deflationary pressures in the manufacturing sector.
On top of that, the monthly CPI inflation for China registered negative at -0.1% in November. This lack of consumer spending is an ominous sign for sustained economic growth in China. Since China is Australia’s largest trading partner, these figures imply that fluctuations in Chinese economic performance could directly impact demand for Australian exports and subsequently influence the AUD’s value.
As China’s economy continues to expand, it puts upward pressure on Chinese imports of raw materials and other goods from Australia. As such, any positive growth data from China would likely support the AUD, especially if it comes in greater than anticipated by the markets. Market analysts have marked the September 16 high of 0.6688 as an important resistance level AUD/USD pair.
Domestic Factors Influencing the Australian Dollar
Though international factors weight significantly on the AUD, domestic economic conditions truly are significant as well. Rising inflation levels in Australia puts significant pressure on consumer purchasing power. In addition to changing willingness and ability to frontload investment, these changes are affecting the monetary policy decisions of the RBA. The AUD is highly sensitive to interest rate movements, so an increased inflationary environment may trigger interest rate revisions that would impact the AUD’s appeal to investors.
Furthermore, Australia’s growth rate has emerged as the most important measure of economic wellbeing. A positive growth rate tends to make the AUD rise since it shows that the economy is booming and draws the foreign investment necessary to do so. If growth were to flatline or regress, it would likely drive the currency lower compared to its peers.
The other key ingredient in the AUD’s magnetic recipe is as simple as the trade balance. A positive trade balance indicates that Australia is exporting more than it is importing. This can have the effect of increasing the value of the AUD, as international demand for Australian goods increases. A persistent trade deficit can have the effect of devaluing a currency. For starters, it means a country’s economy is more dependent on the production of others.
Current Market Trends
As of incorporation, the AUD/USD is 0.08% lower on the day, at about the 0.6635 level. Market participants are spooked by conflicting economic news from China. These worries about future inflation in Australia have resulted in this small downward shift. Traders are watching closely for Chinese economic data. Anything more favorable than is currently anticipated would put some wind back into the sails of the beleaguered AUD.