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Basic Understanding of The Australian Economy

The Australian Dollar (AUD) belongs to the select club of developed countries’ currencies. A free-floating currency, it is the flagship of the Asia-Pacific region.

The Aussie pairs part of the FX dashboard are extremely popular among traders. Various correlations exist between different AUD pairs and other markets. For this reason, a sound understanding of the Australian economy helps to explain such correlations.

Here is a start, as this article offers a basic view of what is happening “Down Under”, as Australia is also called.

A Quick View of the Australian Economy

Australia is a mineral rich country. As such, the mining industry plays an important role in the country’s welfare, employment level, and Gross Domestic Product (GDP). As a comparison between different sectors, the mining sector accounts for 10% of the Australian output, while the construction sector is responsible for only 8%. No other developed economy depends on the mining sector that much as Australia does.

Due to this, the Australian Dollar (AUD) is overly sensitive to commodity prices movements. Gold, in particular, drives wild moves in the AUD pairs.

Take this 2020, for instance. The price of gold denominated in USD (XAUUSD) rose to an all-time high. At the same time, the AUDUSD rose from 0.55 to 0.73. However, the stronger currency did not affect the Australian economy that much because the rise in the price of gold did offset part of the currency strength.

Another thing to consider about Australia is related to its trading partners. China and Japan alone account for 46% of Japanese exports – a big chunk by all means. China, in particular, is viewed as the main driver for the longest economic expansion that took place in Australia prior to the pandemic. As China grew, Australia benefited.

Even in 2020, the Chinese economy is the only one forecasted by the OECD to have economic growth. Thus, Australia’s economy will be resilient, poised to outperform its peers.

Almost two-thirds of Australia’s exports are resources, mainly raw materials. The other third belongs to services, agricultural products, or manufacturing.

In other words, the Australian economy is not your regular economy to interpret. The drivers influencing the value of the AUD come not only from the monetary policy area but from other areas too.

Trade plays a crucial role for the AUD, as the economic health of the region does too.