The strength of China’s economy is critical to Australia’s economic success. Given that China is its largest trading partner, their economic relationship is key. With significant exports of raw materials, goods, and services, fluctuations in China’s economic performance can directly influence the value of the Australian Dollar (AUD). The shifts in trade between these two countries further expose the degree to which their economic relationship is interdependent and dependent on a precarious balance.
When China’s economy thrives, it often results in increased demand for Australia’s abundant resources. Yet this demand can nowhere near match the surge in value this creates for the AUD. When China’s growth inevitably disappoints, Australia will pay the price. This is particularly the case when the topic involves appreciation or depreciation of its currency. This growing correlation between the U.S. and Chinese economies means that for all stakeholders, it is increasingly critical to keep a close eye on Chinese economic indicators.
The Role of Iron Ore in Australia’s Exports
Iron ore remains Australia’s most significant export, accounting for a substantial portion of the nation’s trade revenue. This critical resource is a major factor in determining the value of the Australian Dollar to other currencies. As China industrializes and builds out its infrastructure, the demand for iron ore skyrockets. This additional demand supercharges Australian mining corporates. It further compounds this pain by strengthening the AUD as foreign buyers rush to secure these exports.
The relationship is not one-sided. China’s economic fortunes will continue to cast a long shadow over the price of iron ore. When China’s economy grows less quickly, it buys less iron ore. This increase in overseas selling pressure can result in lower share prices, which has a direct damping effect on the AUD. Positive or negative surprises in Chinese economic data can have an instant impact on the iron ore market. These adjustments impact the AUD immediately too.
Inflation and Trade Balance Effects on Currency Value
Besides the direct impact of Chinese economic performance, other fundamentals have played a role in determining AUD value. Australia’s inflation rate is one of the biggest factors that affects if the Australian dollar strengthens or weakens. Moreover, high inflation can reduce purchasing power and contribute to worse exchange rates. On the other hand, low inflation is a powerful currency appreciation factor.
Additionally, Australia’s growth rate and trade balance are significant determinants of the AUD’s strength. An impressively high growth rate is great news for an economy overall, making it attractive to foreign investment and strengthening the currency of that country. A positive trade balance can increase the AUD’s demand. This is usually the case when there is high demand for our strong Australian exports. Foreign buyers’ willingness to have these exports means that more upward pressure is put on the currency.
The Future Outlook for Australia and China
What lies ahead for both economies is uncertain but vital to each other’s stability. Energy analysts expect Australian resources to thrive on continued robust demand. That trend isn’t going away anytime soon, as China continues to build and reboot their economy post-pandemic. Ongoing inflationary pressures in Australia are making the situation even harder. At the same time, potential Chinese economic slowdowns might threaten this lucrative relationship.