Australian Dollar remains calm despite strong China Trade Balance data
- Australian Dollar has not reacted significantly to the upbeat China’s Trade Balance data.
- China Imports grew by 27.4%, while Exports rose by 19.4%.
- The US Dollar ticks lower as oil prices have corrected.
The Australian Dollar (AUD) remains steady against its major currency peers, trading flat around 0.7050 during the Asian trading session on Tuesday. The Aussie pair consolidates even as the Chinese Trade Balance data for May has come in stronger than expected.
Given that the Australian economy relies heavily on its exports to Beijing, the impact of the Chinese Trade Balance data remains significant on the Australian Dollar.
China’s Trade Balance has arrived at $105.43 Billion, higher than the $92.1 Billion estimates and the previous reading of $84.82 Billion. Imports grew strongly by 27.4%, while they were anticipated to rise moderately by 25% vs. the prior release of 25.3%. While Exports rose 19.4% against expectations of 15% and the previous release of 14.1%.
Going forward, investors will focus on China’s Consumer Price Index (CPI) data for May, which will be released on Wednesday.
Meanwhile, the US Dollar (USD) trades marginally lower as oil prices have cooled down, following a halt in hostilities between Israel and Iran. As of writing, the US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, ticks lower at around 99.95. The exchange of attacks between Israel and Iran stopped after United States (US) President Donald Trump urged for a ceasefire.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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