The Australian Dollar (AUD) continues to struggle against the Australian Dollar as data from China’s economy continue to uncover surprise growth reports. In May, China’s retail sales grew by 6.4% YoY, well above the forecast of 5.0%. That increase in consumer spending is a big deal for Australia. This is particularly significant at a time where Australia is heavily reliant on China as its largest trading partner. This atypically good news has a domino effect throughout multiple economic indicators. It cushions the blows to the Australian economy and strengthens the Australian currency.
China’s industrial production saw a year-over-year increase of 5.8%, although it fell short of the forecasted 5.9% and dipped from April’s figure of 6.1%. Australia’s economy has benefited from its plentiful resources and its big export market, particularly in terms of iron ore. As such, fluctuations in Chinese growth data have an immediate impact on the strength of the AUD and its trading pairs.
At the time of writing, the AUD/USD pair is trading 0.11% in the red, currently quoted at 0.6480. This trend is an illustration of the ambivalence facing recent Chinese economic data.
Impact of Chinese Economic Performance
Australia’s close economic ties with China mean that shifts in the Chinese economy have a substantial impact on the Australian Dollar. As the largest trading partner, China’s trade activities heavily influence Australia’s resource sector, particularly in commodities like iron ore. As a final result of this relationship, there is a direct channel established between Chinese economic health and the value of the AUD.
As the relationship works, positive surprises in Chinese economic data typically results in AUD appreciation. Conversely, negative developments can trigger depreciation. The new data coming in from China suggests this is a sea change. Retail sales blew past expectations and industrial production came in below forecast, leaving traders with a split picture.
“China’s May Retail Sales rose 6.4% year-over-year (YoY) vs. 5.0% expected and 5.1% in April.” – FXStreet
Domestic Influences on the Australian Dollar
Chinese growth data is one of the more important measures that affects the Aussie Dollar’s ability to perform. Beyond the domestic political, though, domestic economic indicators remain key. Current inflation rates in Australia have a direct impact on their currency strength. Because higher inflation erodes buying power, over time making a currency less attractive, while lower inflation can have the opposite effect.
Finally, one more relevant factor to make it 7 times—Australia’s own growth rate is a key driver of AUD value. A robust domestic economic outlook generally undergirds a stronger dollar, drawing in more foreign investment. On the other hand, sudden news of a growth slowdown can cause an abrupt depreciation as confidence in the market erodes.
Additionally, Australia’s trade balance is the third key factor impacting the AUD. A growing positive trade balance, meaning that exports are greater than imports, usually has the effect of strengthening the currency. Iron ore is now Australia’s largest export. Reasons
Changes in global demand, particularly from China, can dramatically move trade balance numbers and thus affect the AUD.
The Broader Economic Landscape
Given the apparent interconnectedness of global economies, any expectations that Australian economic performance exists in a bubble is naive. As Australia completes its rocky transition to a new economic reality, all eyes should be on China, and more broadly, Asia.
Recent data from China underscore and exemplify this new reality. Retail sales came out solid, but the weakness in industrial production numbers suggest trouble ahead. Market analysts will be watching these trends at the same time as they try to ascertain what these trends mean for both economies.
Recent trends evidence cause for optimism as retail sales begin to increase. Unfortunately, we’ll want to temper that excitement with a bit of skepticism as all signs point to industrial production missing the mark. Traders will react to both foreign and home country indicators. Given this mixed economic data, volatility can be expected in the AUD.