Australia’s economic landscape literally goes hand-in-hand with the fate of its closest trade partner, China. This would explain why, according to recent data, China’s Services Purchasing Managers’ Index (PMI) hit 51.1 in May. This is a positive change from 50.7 in April. This figure is in step with market expectations and shows a slow but brisk uptick in the Chinese economy. The effects of this expansion impact not only China, but Australia—most notably in its impact on the AUD’s value.
Finally, the overall health of the Chinese economy is incredibly important to the fate of the AUD’s value. When China’s policy settings are stimulatory, it tends to boost Chinese imports of raw materials, manufactured goods and services from Australia. As a result, this increase in global demand for Australian exports puts upward pressure on the AUD. As observed following the latest data release, the AUD showed little reaction when the Chinese economy grew as anticipated.
Influence of Trade Dynamics on the Australian Dollar
Given China is now Australia’s largest trading partner, the health of its economy is paramount. The trade relationship plays a major role in the AUD’s performance against other currencies. So when China is doing well economically, its demand for Australian exports increases. This additional demand puts upward pressure on the AUD, appreciating it.
This relationship is not linear. The AUD normally shows greater choppiness given an anticipated positive growth print out of China. Instead, as we find in the analysis, it often reacts harder to surprises in growth data. Like most economic releases, positive surprises have the potential for significant AUD upside, while negative surprises can see the AUD decline sharply. As such, traders and analysts alike pay very close attention to Chinese economic indicators, since they hint at possible movements in the AUD.
The value of the AUD moves in line with Australia’s trade balance and inflation rates. Often, as in the past, a trade surplus—when a country has more export value than imports—would help raise the AUD. Increasing inflation in Australia itself would decrease purchasing power, which could lead to depreciation of the currency. Thus, multi-pronged methods are needed to grasp the forces at work affecting the AUD as the forces at Xi’s will continue to affect China’s rapidly evolving economic environment.
Key Export Drivers and Their Impact on Currency Value
Iron ore remains Australia’s most significant export commodity and a critical driver of the AUD’s value. China’s industrial production and construction activities are booming. This surge greatly increases its demand for iron ore, which can further strengthen the AUD on its own. Commodity prices and currency values have a well-known and highly influential one-to-one relationship. Indeed, when demand from China increases iron ore prices, the AUD usually appreciates too.
Beyond iron ore, Australia exports a variety of goods and services that all play an important role in keeping the economic engines of the country humming. When foreign buyers look to purchase these commodities, surplus demand for the AUD increases its value. This dynamic is especially evident when China’s economic growth beats projections, causing Chinese importers to ramp up their purchasing in anticipation of the higher growth.
Additionally, issues like Australia’s relatively high growth rate keep the AUD strong. Favorable economic indicators create an atmosphere attractive for investment and consumption, which reinforces the upward pressure on the currency’s value. Therefore, maintaining a healthy economic environment is paramount for Australia, especially given its reliance on trade with China.
Monitoring Economic Indicators for Future Trends
Investors and traders highly watch the China and Australia economic indicators. Understanding their interdependencies is essential for the public and decision-makers to understand in order to make smart choices. China’s latest PMI release makes an instructive example. While growth that was already anticipated will not directly affect the AUD in the near term, any surprises going forward will carry heavy AUD risk.
This is especially true for the Australian financial markets, which are quite sensitive to surprises on the inflation as well as the growth side. As these elements change over time, so too does the investment landscape surrounding the AUD. Thus, stakeholders have to pay close attention to new trends and data as they emerge from both countries.