The Australian Dollar (AUD) has remained surprisingly resilient against a contrasting outlook. It is especially beholden to the health of the Chinese economy. Since trade with China makes up over one-fourth of Australia’s total exports, China plays a considerable role in the demand for Australian commodities. This important relationship is determinative of the value of the AUD as well. According to the latest labour force figures released today, job creation in Australia is stagnating. Nonetheless, the currency has rebounded from its early declines.
The new numbers showed that Australia created just 14.9K jobs, missing the forecast of 17K by a wide margin. An uptick in layoffs—11.8K for August—has sparked doubts about how strong the domestic economy is. Unsurprisingly, given all the bad news, the AUD plummeted on the day. Chinese foreign buyers aggressively pursued all Australian resources, and particularly iron ore—that sector now stands as the primary pillar of the country’s export economy.
Impact of China on the Australian Dollar
Australia’s dependence on commodities means that China’s economic performance is a major driver of the Australian Dollar. Australia does well as a commodities rich country when China’s economy is booming. This drives a tremendous increase in raw materials, product, and service demand. This makes the relationship between these two economies – the Chinese and the American – very important. When China does well, it purchases more of Australia’s exports, strengthening the AUD.
In contrast, even the slightest indication of a slowdown in China’s economy can result in an instant and severe backlash for the Australian dollar. Each time in the past when new growth figures out of China disappointed expectations, it sparked sharp selloffs in the AUD. These latest reports marking a potential turning point in China’s economic trajectory have spurred risk-off trading behavior as investors tread more lightly.
As market analysts make clear, positive surprises in Chinese growth data have a way of delivering outsized boons to the AUD. When China’s manufacturing sector grows more than anticipated, demand for Australian exports often follows suit. Equally important, the demand is fed by an increase in consumer spending in China. This situation increases the value of the AUD and balance of trade and stabilizes the AUD worth against fluctuations even more so.
Domestic Factors Affecting the Australian Dollar
And although clearly, external influences from China are an important part of the story, there’s a domestic component that’s driving the value of the Australian Dollar. Inflation is the other big thing to think about. As prices increase at a rapid pace across Australia, purchasing power deteriorates, which will eventually lead to lower long-term rates of economic growth. More inflation generally means more aggressive tightening of monetary policy, which can boost or depress the AUD depending on how the market interprets the monetary policy path.
Australia’s growth rate is another critical factor. A high growth rate increases confidence in the eyes of foreign investors. This, in turn, increases demand for Australian assets and currencies, resulting in appreciation. A slowing growth rate might spook investors and be bad for the AUD.
At the same time, Australia’s trade balance—exports minus imports—is an important factor in assessing currency strength. In the longer term, a large positive trade balance tends to reflect high global demand for Australian goods—which creates upward pressure on the AUD. A trade deficit might indicate future currency weakness, because when domestic demand grows faster than export markets, the currency weakens.
The Role of External Market Dynamics
In addition to these measures, the broader global international market dynamics weigh into how the AUD performs against the other currencies. The US Dollar Index (DXY) was recently trading near its weekly low just above 98.50, causing ripple effects across currency markets worldwide. A weaker USD strengthens the appeal of any other currency, including the AUD. This boom lures investment and pushes up the exchange rate of the AUD.
Market participants continue to watch for global economic indicators that are capable of changing investor sentiment. The interplay between commodity prices—especially iron ore—and trade relations with China remains at the forefront of discussions among economists and traders alike.