Why the Australian Dollar Could Fall if China’s Economy Slows

The Australian Dollar (AUD) is widely recognized as a “commodity currency”. Its value is often influenced by global commodity prices and economic shifts in major trading partners. Among these partners, China plays a particularly crucial role, as it is Australia’s largest trading partner by a significant margin. Given this deep economic relationship, any sign of a recession in China could have profound effects on the AUD. In this article, we explore the reasons why the Australian Dollar is vulnerable to fluctuations in China’s economy and what a potential Chinese recession could mean for currency markets.

1. Australia’s Economic Dependence on China

China is the dominant buyer of Australia’s commodity exports, particularly iron ore, coal, natural gas, and agricultural products. In 2023, China accounted for about 36% of Australia’s total exports, making it a critical pillar of Australia’s economy. As demand from China falls, so too would Australia’s export revenues, making the Australian economy and the AUD particularly vulnerable to a Chinese recession.

2. Commodity Prices and the AUD

The AUD’s value is closely tied to global commodity prices, especially iron ore and coal, which are integral to Australia’s export economy. If China, the world’s largest consumer of commodities, experiences a recession, global commodity prices would likely decline due to reduced demand. This decline in commodity prices would have two major impacts on Australia:

• Export Earnings: Lower commodity prices mean that Australia earns less for the same volume of exports. This reduces national income, leading to slower economic growth and a weaker currency.
• Investor Sentiment: As commodity prices drop, global investors would likely reassess their exposure to currencies like the AUD, which are seen as riskier during periods of economic downturn. As a result, the AUD would face downward pressure as investors seek safer assets.

3. Interest Rates and Monetary Policy

Another significant factor that could lead to a decline in the AUD is Australia’s monetary policy response. If a Chinese slowdown significantly hampers Australia’s economy, the Reserve Bank of Australia (RBA) might need to cut interest rates to stimulate growth. Lower interest rates make the AUD less attractive to foreign investors in comparison to currencies with higher or more stable rates. For example, if the US Federal Reserve keeps interest rates higher while the RBA cuts, the AUD would likely weaken against the US Dollar (USD) due to a growing interest rate differential. Additionally, if inflation remains low, there is less incentive for the RBA to raise rates, further reducing the appeal of the AUD in global markets.

4. Risk Sentiment and Safe-Haven Assets

In times of global economic uncertainty, investors tend to shift their capital toward “safe-haven” currencies such as the US Dollar , Japanese Yen , and Swiss Franc. The AUD, being more sensitive to commodity prices and global trade dynamics, is typically viewed as a risk-on currency.

If a recession in China sparks a broader economic downturn, or even a perceived risk of one, investors are likely to pull money out of riskier assets, including the AUD, and into safer currencies. This flight to safety would amplify the downward pressure on the Australian Dollar.

5. What Investors Should Watch For

For investors holding or trading the Australian Dollar, monitoring China’s economic health is critical. Key indicators to track include:

• Chinese GDP Growth: Any significant decline in China’s GDP growth is a red flag for AUD holders.
• Commodity Prices: Iron ore, coal, and natural gas prices are good proxies for Australia’s export earnings potential.
• Interest Rate Movements: Investors should pay close attention to RBA statements, especially if the central bank signals a dovish stance in response to slower economic growth.
• Geopolitical Developments: Shifts in trade relations or sanctions between China and Australia could affect export volumes and impact the AUD.

Conclusion: Navigating the Volatility

The Australian Dollar’s fate is intricately linked to China’s economic performance. In the event of a Chinese recession, the AUD is likely to face significant downward pressure due to reduced demand for commodities, lower export earnings, and shifting global risk sentiment. While these factors can create volatility, they also provide opportunities for informed investors to capitalize on currency movements.

In times of uncertainty, those involved in forex trading, international business, or investment in Australian assets should remain vigilant and adjust their strategies accordingly. The potential decline in the AUD in response to a slowing Chinese economy may be one of the most important trends to watch in the coming years. Watch the YouTube video on AUDUSD Top down analysis.

 

FOREX COPY TRADING EXPERIENCE 🇰🇪

HF MARKETS KENYA VS WINDSOR BROKERS KENYA

Severally, I have advocated to investors and clients to approach forex trading as a wealth creation business. This view has always informed my preference for forex brokers with wealth creation platforms like forex copy trading.

Since 2022, I have limited my participation in the forex space to brokers with copy trading platforms in Kenya. Windsor Brokers Kenya, HF Markets Kenya, Ingot Brokers, BD Swiss, and FXTM have been my preferred brokers. My experience with all these brokers ranges from good to bad and everything in between.

In this article, I shall focus on HF Markets Kenya, my oldest copy trading account, and Windsor Brokers Kenya, my fastest-growing copy trading account in terms of investors.

To keep this as objective as possible, I shall focus on the following parameters in order of importance;

1. Trading conditions and
2. Onboarding experience

Kindly note, that my experience is limited to Kenyan-regulated forex brokers. Secondly, my experience is based on my preference for swing trading approach.

 

1. 
   

   Trading conditions

This, by far is the most important parameter in your forex trading journey. From swaps, leverage, spreads, and commissions, trading conditions can aid or deter your growth in the forex space. In this section, I shall focus on swaps. A swap is an agreement to simultaneously borrow one currency and lend another at an initial date, then exchange the amount at maturity.

To illustrate, let’s say I am long EURUSD i.e. I am buying the Euro and selling the US Dollar. Further, let us assume the interest rate for the Euro is 4.5% and 5% for the Dollar. Since I am buying the Euro at 4.5% and selling the Dollar at 5% the swap will be 4.5%-5% equals -0.5%. What if we were short Euro and long Dollar, the swap rate would be 5%-4.5% equals +0.5%.

The swap rate is an acceptable cost in forex trading that is deducted or added to your profit or loss. Forex brokers, however, sometimes add a cost to the swaps as a way of generating revenue. Unfortunately, some brokers charge exorbitant swaps that excessively eat into your profits. The images below show the swaps charged by HF Markets Kenya and Windsor Brokers Kenya for similar trades executed concurrently.

 

Evidently, on this vital parameter, Windsor Brokers Kenya is off to a poor start. For the EURGBP trade,  the swaps charged are twice (-2.22 versus -4.33) what is charged by HF Markets Kenya. Coincidentally, I have received a similar complaint from a follower on the Windsor platform.

Unfortunately, amateur traders and investors do not fully understand the effect of exorbitant swaps on their trading experience.

 

2. 
   

   On-boarding experience.

Experienced traders and forex affiliates will agree with me, that a technically difficult on-boarding process is a deterrent to investors. Nobody wants to keep receiving the same complaint concerning a difficult platform. Investors and traders alike prefer a platform that is fairly easy to understand and navigate.

On this parameter, Windsor Brokers take the win. Right from registration to opening and joining their copy trading platform, the experience is not as difficult as their competitor HF Markets Kenya.

Their onboarding questions are a turn-off. Severally, I have had to help clients answer the questions only to find more questions when registering for the copy trading platform. Their reaction tells you they are not impressed with the process. To compound the experience even further, you are required to answer the questions every 6 months. Unfortunately, by this time, lots of investors have already forgotten their passwords and or answers to these questions.

If investors do not answer these questions, their investment subscription is suspended until they complete this process. No investor wants such a prohibitive platform; therefore, Windsor Brokers Kenya takes the win.

Ostensibly, we have a draw on the cards. However, if we are to evaluate the effects of these two parameters, trading conditions carry the day, therefore, HF Markets Kenya wins this round. I believe simplifying their onboarding process is an easy fix if they want to do it.

For Windsor Brokers Kenya, changing liquidity providers, by extension changing the swap cost setup up may take unnecessarily long, consequently, traders and investors alike will register lower profits. My experience tells me, that should they ignore the swap issue, they are likely to lose business in the long term.

 

In the coming quarter, I will be doing a review of FXTM and BD Swiss in addition to HF Markets and Windsor Brokers Kenya, stay tuned.

 

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Q1 2024 COPY TRADING PERFORMANCE

A brief video outlining my 2024 forex copy trading performance.

Detailed video available on YouTube