The Australian Dollar (AUD) sees swings heavily correlated to the economic performance of China, Australia’s biggest trading partner. As a resource-rich country, Australia has a long history of dependence on exports. Iron ore is Australia’s most valuable export commodity. These recent trend shifts in China’s economic growth are highly relevant for the direction of the AUD/USD exchange rate.
Australia’s economy thrives on its resource exports. Together, with an abundance of natural resources, it has to set itself up to be a key supplier of growing, demanded essential commodities. Iron ore, almost entirely exported to China, is bedrock to Australia’s trade surplus and Australia’s economic prosperity. China’s rapid growth powers the demand for Australian iron ore. The nation uses unprecedented, disproportionate sums of this utility to fuel the engine of its industrial base.
Impact of China’s Economy on Australia
As such, China’s economic performance is going to impact the most direct drivers of the factors influencing the AUD. During times when China’s economy is doing well, Australia typically experiences a boom in demand. This demand extends to the raw materials, goods, and services supplied by the country. This increase in demand helps to raise demand for Australian exports and raises the value of the AUD. If China releases bad growth figures, this leads to an immediate fall in demand for Australian exports. This reallocation usually results in downward pressure on the AUD’s value.
The deep and growing interdependence of these two economies is on full display in the fierce and bilateral trading relationship. As Australia’s largest trading partner, any fluctuations in China’s economic health send ripples through the Australian economy. Any positive surprises in China’s growth data would likely give the Australian dollar a healthy kick. In turn, this means foreign buyers will look to buy more Australian commodities. At the same time, any disappointing growth figures from China can rattle confidence in our economy. This, in turn, weighs on the AUD.
Key Economic Indicators for the AUD
Five key economic indicators are fundamental in deciding whether the AUD is strong or weak. Australia’s inflation rate is the most important fundamental, impacting the strength of the currency directly. If inflation goes up, that would produce upward pressure on interest rates, which could draw in foreign investment and increase demand for the AUD. Secondly, Australia’s economic growth rate is key. Positive and larger than expected growth rates indicate a strong economic reality, which will in turn support the dollar.
Australia’s trade balance, which reflects how much the nation exports compared to imports, is another major influence on the AUD. The typical effect of a trade surplus on the AUD. This occurs as foreign buyers are buying more Australian goods than what Australia is bringing in. This positive shock in demand for exports may trigger an appreciation of the AUD in relation to other currencies.
As of this writing, the AUD/USD pair is at about 0.6697. To some degree, this figure expresses the prevailing market mood and economic context both with regard to Australia and about China itself. These surprises can send the AUD flying or crashing as traders watch every new economic indicator emerging from China.
Future Outlook for the Australian Dollar
As we look ahead, analysts expect that strength or weakness of the Australian Dollar will remain a marker for the course of China’s economy. As long as China grows at a robust rate, the need for Australian iron ore will remain robust. Other Australian commodities will enjoy strong demand, too. This continued demand might strengthen the AUD even more.
Inflation trends and trade wars ignite volatility on currency markets due to various factors affecting global economy. Both domestic and foreign investors would be wise to keep their eyes peeled for what these indicators may signal. These external and internal factors will have massive ramifications on Australia’s economic landscape.