Australian Dollar, Commodities and China

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Australian Dollar, Commodities and China
With a range of natural resources like iron ore,
coal, petroleum gas, gold, and copper, Australia
is one of the world's most resource-rich
countries. According to Statista, their natural
resources are worth an estimated 19.9 trillion.
Furthermore, Australia contains the worlds
largest iron ore reserves. As a result, the
mining industry plays a great role in the
countrys economy. According to Worlds Top
Exports, Australia is the worlds largest
exporter of iron ore, making up 53.6 of the
total share of exports in 2021. Additionally,
they are also the worlds largest exporters of
coal, making up 35.7 of the total share of
exports and the worlds second-largest gold
producer in 2021, as reported by Worlds Top
Exports. Thus, the exports and production of
those commodities contribute greatly to the
Australian economy and currency. Due to this
fact, the Australian Dollar is classified as a
commodity currency.A commodity currency is a
currency whose value is closely linked
with commodity prices. Other examples of
commodity currencies include the Canadian Dollar,
the Russian Ruble and the New Zealand Dollar. The
Australian Dollar's price tends to correlate with
iron ore and gold prices. For example, Figure 1,
extracted from MacroMicro and displayed below,
illustrates the relationship between gold prices
and the price of the Australian Dollar.Figure 1
Gold Prices vs AUD/USD (MicroMacro)As shown in
Figure 1, the fluctuations in gold prices have an
effect on the price of the Australian Dollar. For
instance, once the price of gold started to rise
at the beginning of 2022, the Australian Dollar
followed suit. Moreover, another important
feature of the Australian Dollar is its
relationship with China. The Australian Dollar
responds strongly to changes in the Chinese
economy due to the fact that China is their
largest trading partner. For instance, China is
the largest importer of Australian iron ore and
coal. Last year, the value of goods exported from
Australia to China was worth a whopping 115.7
billion as reported by Statista.Figure 2,
published by MacroMicro, illustrates the
relationship between the Chinese iron ore prices
and the Australian Dollar.When the Chinese
economy is performing well, the demand for iron
ore increases and along with that the price of
the Australian Dollar increases. On the other
hand, if the Chinese economy is underperforming,
they will demand less of iron ore lowering their
prices and in turn lowering the price of
Australian Dollar. Despite the commodity boom
that happened due to the Russia-Ukraine war and
rising worldwide inflation, the Australian dollar
is not booming as one would expect of a commodity
currency. This can be explained by taking a look
at the economic situation in China. Due to the
COVID waves in China, strict lockdowns were
introduced. This has reduced the demand for
Australian exports, mainly iron ore, which in
turn as previously mentioned decreased the price
of the Australian Dollar. When one considers
trading the Australian Dollar, it is important to
observe the commodity prices along with the
economic situation in China. Original Source
Australian Dollar, Commodities and China