On Friday, the Australian Dollar dropped substantially against the US Dollar. This drop completely erased the progress made during the last markup. The drop in the AUD is a product of both local and global economic conditions. Perhaps the most significant is the rolling price disaster that is Iron Ore, Australia’s biggest export. The Reserve Bank of Australia (RBA) plays an important role ensuring our economy remains resilient. Specifically, it aggressively raises interest rates to combat inflation. Economic projection still indicates a growing budget deficit and moderate GDP growth. Consequently, these developments leave the AUD in a difficult position to maintain its value.
Iron Ore Prices and Their Impact on the AUD
To say Iron Ore is important to the Australian economy would be an understatement, as it is Australia’s most valuable export commodity. As of 2021, Iron Ore exports were worth $118 billion per year, with most going to China. The price of iron ore has a major impact on the AUD. Iron ore is Australia’s biggest export earner, so when prices for the commodity go up demand for the Australian dollar rises. When Iron Ore prices increase, that tends to lead to a positive Trade Balance for Australia, which strengthens the AUD even more.
Iron Ore prices and the AUD correlation are the favorite pit stop for economists, traders, and clueless pundits. When Iron Ore prices spike, the AUD is sure to follow. This occurs simply because there is higher aggregate demand for that currency. In the opposite scenario, if Iron Ore prices were to fall, the AUD could depreciate as demand for the commodity would decrease. The health of the Chinese economy plays a major role in demanding Iron Ore. Being that China is Australia’s single biggest trading partner, any changes in their economy have an effect on the AUD’s value.
Economic Projections and Fiscal Outlook
Economic projections for Australia indicate a budget deficit of A$27.6 billion for the fiscal year 2024-25 and A$42.1 billion for 2025-26. Though saddled with these deficits, GDP growth is forecasted at 2.25% in 2026 and 2.5% in 2027. These projections point to the mounting challenge of the Australian economy, in sustaining strong economic growth at a time of increasing fiscal limitations.
The RBA’s stated main objective is to keep inflation between 2-3% by raising and lowering interest rates. All 39 economists surveyed expect the RBA to hold the cash rate at 4.10% on April 1. But future rate expectations are all over the place, with the Fed’s own median forecast expecting two rate cuts in 2025. Most analysts are forecasting two of these cuts to come in May and September, each of 25 basis points. By the third quarter of 2025, this will bring the rate down to 3.60%.
The expected tax cuts seem unlikely to be based on policy considerations, but rather to be politically conceived for solidifying political capital during the gloomy economic times. These fiscal measures could have implications for Australia’s fiscal health and influence investor sentiment regarding the AUD’s future trajectory.
Trade Balance and Currency Valuation
The Trade Balance is another important factor in the determination of AUD RBA depreciation. It is the net amount the country receives from the sales of its products abroad compared to the payments it makes to other countries for their goods and services. A positive net Trade Balance supports the AUD, whereas a negative balance could do the reverse.
Australia’s ability to produce highly sought-after exports enhances its currency’s value due to surplus demand from foreign buyers seeking to purchase its exports. Within this paradigm, Iron Ore continues to be Australia’s largest single positive contributor to the Trade Balance and health of the Economy.
Yet at the same time, China is Australia’s largest trading partner. This is what makes the health of the Chinese economy so important in determining the value of the AUD. Fluctuations in China’s economic performance can have ripple effects on Australia’s export demand, impacting both the Trade Balance and the currency’s strength.