AUD exchange rates continue to sink in the last one month. Not only weaken against USD, Aussie also fell to five months low against its neighbor, NZD. From forex news, we can see that AUD is not only impacted by the usual factors that influenced forex, but also China economic reports. How come China partake in AUD/USD trade?

AUD exchange rates continue to sink in the last one month. Not only weaken against USD, Aussie also fell to five months low against its neighbor, NZD. From forex news, we can see that AUD is not only impacted by the usual factors that influenced forex, but also China economic reports. How come China partake in AUD/USD trade?

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Graphic of AUD/USD Nov 20-Dec 16, 2013

Theoretically, exchange rates of a certain currency is determined by inflation, interest rates, trade balance, public debt, export-import ratio, and political-economic stability. Therefore, if we take part in AUD/USD trading, then we have to observe data, issues, and predictions related to the six determinants, both in Australia and in the US. But in reality, there could be more players in the field. This is what happened with Australia.

Chinese Influence
Australia's economy was dominated by service sector, but its growth was boosted by mining and agriculture. Two of its most important commodity are coal and iron ore, both of them were exported to East Asia, mainly China. These exports were responsible in launching Australia to be one of the countries with highest GDP in the world. This also led China to be Australia's biggest export destination in the last decade. Naturally, market assumes that Australia's growth is identical to China's industry development. As the result, China became one of the main indicators that determine AUD exchange rates.

Latest sample in the topic of China's influence on AUD was weakening AUD/USD on Monday after disappointing China PMI release. Analysts predicted it to increase, instead, it decreases. PMI (Purchasing Managers Index) is economic health indicator from Manufacturing sector. Increased PMI signals better industry, and this commonly cause increases in exchange rates. Disappointing China's PMI made the market worried that Australia's exports will be disturbed. Predictions on worsening industry climate in China were one of the reasons behind the downfall of AUD.

Black and White of Australia
Today Aussie fell further after Reserve Bank of Australia (RBA) again mentioned the possibility of further cuts on cash rate based on the belief that it could stimulate the economy. Meanwhile, market players see such policy with suspicion, especially because RBA did it much too often. In 2013 alone, they've done it twice till the current rate, 2,50. Interest rates and RBA policies, including RBA president's statements, are another two determinants of AUD. These worsening indicators further compounded by bulging deficit, high private sector debt, lack of exports from manufacture industry, and property bubble concerns.

For the time being, it seems the circumstances around Aussie quite murky. PM Tony Abbott statement today that Australia will face a decade of deficit certainly doesn't help. It's undeniable that market expectation on AUD is at its lowest. AUD prospect till the end of this month is not good. Will it bounce back? Well, it could be, only if there is a new and better reports from China or if RBA take back its statements.  

Nevertheless, we can't forget that Australia was one of the fastest countries to came out of crises. They have relatively stable financial system and good credit rating (latest rating is AAA). So, don't be surprised if during the bearish trend, Aussie will show resistance here and there.