If you are exchanging or actively trading the Australian and New Zealand dollars, then you need to be aware of China’s growth as one of the most important drivers for these currencies. Due to Australia’s and New Zealand’s trade relations with China, the AUD and NZD exchange rates can be significantly influenced by China’s economy and market news.
Global growth and China’s economy influence the AUD and NZD
When global risk appetite is high and investors are optimistic about global growth, both the Australian dollar (AUD) and the New Zealand dollar (NZD) generally perform well. However, the growth of China, specifically, plays a significant role in determining the performance of these currencies. China can be viewed as the central force that perimeter economies depend on for their economic strength.
China is the top country where Australia and New Zealand export their goods. However, there is more to their connection with China’s growth prospects. Australia plays a vital role as a supplier of raw materials like iron ore, coal, and liquefied natural gas (LNG) to China. These resources are closely tied to China’s ongoing economic growth.
So, when there is a positive outlook for Chinese economic growth, then demand for essential resources rises, causing capital to move from China to the surrounding areas such as Australia and New Zealand.
China-Australia trade relationship
The Australian dollar tends to strengthen when the Chinese economy is doing well. Almost one-third of Australia’s exports go to China, making the Australian economy heavily dependent on demand from China.
Currently, China is considered as Australia’s primary trading partner for both imports and exports. Australia is China’s sixth largest trading partner, the fifth largest source of imports and the tenth largest destination for exports. Around a quarter of Australia’s manufactured imports originate from China, while approximately 13% of its exports consist of thermal coal sent to China.
Due to China’s need for raw materials and economic expansion, Australia is the perfect trade partner to meet these demands. Since the 1970s, China’s manufacturing growth and infrastructure investments increased, creating the need for construction materials, energy for power and transportation, and raw materials for manufacturing. Australia not only supplied these materials, but also acted as a ready market for Chinese manufactured goods.
A key factor that has helped the trade relations between these two countries is Australia’s massive supplies of iron ore. These are close to the sea and easily developed, and the closeness to China for shipping minerals, place Australia at an advantageous position.
China-New Zealand trade relationship
New Zealand is another country that has strong trade ties with China. New Zealand serves as a significant supplier of dairy products and meat, particularly lamb and beef, to China. With China’s expanding middle class, the demand for these relatively high-priced products has increased, which is great news to New Zealand exporters.
When Chinese capital moves from China to New Zealand, the New Zealand economy strengthens and the NZD rises higher.
Risks to AUD and NZD when Chinese economy suffers
When there are concerns about Chinese economic growth, then capital tends to leave the surrounding economies of Australia and New Zealand. This is because the economies of these countries heavily rely on exports, making them more susceptible to fluctuations in the global business cycle. They are generally more vulnerable to external shocks compared to economies that rely on domestic demand for growth. In such situations, the NZD and AUD along with other assets tied to growth, tend to weaken as demand from China for exports from New Zealand and Australia is expected to diminish.
What to have in mind when exchanging AUD and NZD
- When the growth outlook is positive, capital flows from China to the New Zealand and Australian economies.
- When growth prospects are poor, capital flows out of the New Zealand and Australian economies and negatively affects the New Zealand and Australian dollars.
- Australia and New Zealand are important economies relying on raw material exports and they are equally sensitive to global growth conditions as they are to their own domestic economic data.