Unsurprisingly then, the Australian Dollar (AUD) is highly correlated with the Chinese economy. This often overlooked connection has had a tremendous impact on both the direction and volume of trade into and out of Australia. Needless to say, China is Australia’s biggest export market. Therefore, its economic health is vitally important to the demand for Australian exports, particularly our raw materials and resources. Recent data indicates that the AUD is experiencing slight fluctuations, reflecting the ongoing developments in China’s growth indicators and economic reports.
So when China’s economy is booming, as it is right now, it tends to buy more of what Australians have to sell. This increase in demand not only props up Australia’s most economically significant resource-rich export sector, it underpins the value of the AUD. Large adverse surprises in Chinese economic data have immediate and steeply negative effects on the demand for Australian exports. Consequently, the trade value of the AUD would be in for a drastic hit. As of writing, the AUD/USD exchange rate is 0.6475, up a slight 0.11% in daily terms.
The Interconnected Economies
Australia and China have a vital relationship that enormously benefits both countries. This connection is vital not only for our national defense, but for global trade and economic stability. For instance, Australia has made out like a bandit on its fortune as a resource-rich country, with iron ore its biggest export. The price of iron ore does have an outsized effect on the AUD, which is still pegged to the commodity. When demand for China’s exports goes up, prices are driven higher, making the currency more valuable by increasing demand.
Failing China’s strong economic activity, which necessitates the import of vast volumes of raw materials to sustain its factories. From iron ore to coal to agricultural products, Australia has been a reliable supplier. When China is growing, its factories work overtime, creating even greater demand for Australian exports. This, in turn, leads to a surplus demand for the AUD as foreign buyers need to buy the AUD to purchase these resources.
This dynamic is fragile. We will be especially affected if China’s economic indicators start to weaken, depressing demand for our exports. This reduction increases downward pressure on the AUD. Market analysts closely monitor headlines and reports about China’s economic performance, knowing that they can trigger significant shifts in the currency’s value.
Factors Impacting the Australian Dollar
The Chinese economy has an undeniable impact on the direction of the AUD’s value. Many domestic influences play a role in shaping its outcome. For Australia, inflation rates impact the currency’s purchasing power, thereby impacting investor sentiment and eventually their trading behavior. If inflation increases unexpectedly, this can raise fears over an economic slowdown that can, in turn, erode confidence in the AUD.
Australia’s growth rate is a key determining factor. A robust global growth outlook tends to be AUD-positive. This is a sign that the economy can withstand external shocks and maintain strong trade relations. Weak economic growth tends to push the currency down.
The trade balance is equally important. Furthermore, a positive trade balance (a prevailing phenomenon for Australia, meaning it is exporting more than importing) tends to be AUD-supportive. A trade deficit might indicate that demand for Australian goods is decreasing, which would typically put downward pressure on the currency.
Current Market Trends
China watchers are getting more than a little concerned by China’s economic reports. Each of these reports has potential to move the AUD in the near term. This recent spike in the AUD/USD value is a result of traders’ optimism after news of a stronger than expected GDP report for China. It’s still unclear if this trend has enough momentum to persist.
Today’s geopolitical landscape has an impact on currency values. A sudden rise in trade tensions or a deterioration in Australia’s diplomatic relationships can weigh heavily on market confidence and drive foreign investment flows elsewhere. Hence, the AUD is vulnerable to the same developments domestically and abroad.