• 18 Sep 2022

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 world’s largest iron ore reserves. As a result, the mining industry plays a great role in the country’s economy. According to World’s Top Exports, Australia is the world’s largest exporter of iron ore, making up 53.6% of the total share of exports in 2021. Additionally, they are also the world’s largest exporters of coal, making up 35.7% of the total share of exports and the world’s second-largest gold producer in 2021, as reported by World’s 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.

Also Read:- USD soars higher in spite of stagflation

- Leena Othman