Australia, one of the most resource-rich countries in the world, is highly dependent on its trading partnerships—including with China. China is currently Australia’s largest trading partner. Given its wealth, the state of its economy has a great impact on the value of the Australian Dollar. Yet this relationship has become even more critical. Australia is at a pivotal moment, where growth rates and inflation are low and the current account appears to be moving into surplus.
The bedrock of Australia’s export-driven economy, iron ore is the country’s largest export. China, for example, is introducing the more valuable resource to help meet their highly industrialized sector’s insatiable demand for it. It heavily relies on iron ore for construction and manufacturing. As a result, any change in China’s short-term economic prospects sends waves throughout the Australian economy, impacting both trade and currency valuations.
The Influence of China on Australia’s Economy
Australia’s long-term economic prosperity depends on its ability to strike the right balance between a resource-dependent economy and external influences. China remains Australia’s largest trading partner by a large margin. This is why the health of the Chinese economy has an immediate impact on demand for Australian exports such as iron ore. If China’s economy is doing well, the demand for these exports goes up, increasing the value of the Australian Dollar.
On the flip side, if the data coming out of China is consistently more down than up, that’s bad news for Australia’s resource-driven demand. In the past, such outcomes have resulted in a swift fall in the value of the Australian Dollar against other currencies, indicative of the market reappraising confidence. Therefore, keeping a close eye on China’s economic performance is critical to forecasting changes in the Australian Dollar.
The volatility of the Australian dollar is driven by domestic economic conditions, and not just by external factors. Australia’s growth rate is ultimately the most important factor that continues to help drive the Australian Dollar. A high population growth rate indicates a young, vibrant economy, which can encourage investments from abroad and push up the currency. Conversely, sluggish growth can lead to depreciation.
The Role of Trade Balance and Inflation
Another big driver of the Australian Dollar is the country’s trade surplus or deficit. When Australia runs a trade surplus—when it is exporting more than it is importing—this creates more demand for Australia’s currency, pushing the value of its currency up. Either way, iron ore is in high demand across the globe and particularly from China. Such strong demand can contribute to Australia’s positive trade balance, sending the Australian Dollar higher.
Inflation rates inside Australia affects the strength of Brown Australian currency. Continued higher inflation risks hurting purchasing power and forcing central banks to raise interest rates. These shifts in interest rates can change investor perception and expectations, ultimately impacting the Australian Dollar’s exchange rate. A predictable, level inflation rate contributes to currency stability. Conversely, unpredictable inflation causes volatility in the international exchange markets.
China’s Fiscal Support and Its Impact
In the past few months, Chinese authorities have taken on a net stimulus fiscal tone to support growth in the face of worsening external environment. The same support from the Chinese government is overwhelming. This new influx will inevitably create additional economic activity and increase demand for multiple categories of imports—including those from Australia. As China’s economy continues to recover with fiscal support, Australian exports will see a boost in demand.
After all, positive surprises in China’s growth data have historically led to immediate boosts in the Australian Dollar. Investor sentiment Strong economic indicators are viewed as increased consumption of Australians’ resources. That improves their confidence in the currency. We’ve seen that unexpectedly negative news can trigger swift plunges in currency value. This occurs as market participants hastily downgrade their expectations for future demand for Australian exports.
This economic interdependence between China and Australia underscores the narrow tightrope that both economies must walk. While China seeks to stabilize its economy through strategic support measures, Australia must continue to leverage its resource wealth to ensure sustainable growth.