How does the mining industry impact the value of the Australian dollar?

Source: Pixabay

It is common knowledge that the value of a nation’s currency is often a reliable indicator of the health of that nation’s economy.

Nations that have seen significant economic turmoil in recent years, such as Turkey or Venezuela, have seen the values of their own currency plummet against the US dollar and others.

The result has been mass inflation, higher debt, and increased borrowing costs.

In Australia, the value of the Aussie dollar has been closely watched by economists, government figures, and forex traders alike over the decades.

In the past, major economic developments such as the 1991 recession had an adverse impact on the value of the Aussie dollar; at that point, it had only been a free-floating currency for a few years.

While Australia has been recession-free until 2020, the AUD has seen plenty of ups and downs in recent history.

The economy and, by extension, the Australian dollar, fluctuates depending on the importance of different sectors. Therefore, it’s worth looking at how Australia’s vast mining industry impacts the value of the dollar.

At 5.8 per cent of GDP, the mining industry is one of the largest in Australia, responsible for almost half of the country’s exports and over 242,000 domestic jobs.

Much like the rest of the economy, the mining industry has had its share of ups and downs over the decades. Let’s take a closer look at how Australian mining is directly connected to the value of the Aussie dollar.

Mining and AUD: The how and why

As the official IG guide to forex trading highlights, the Australian dollar is one of the most commonly traded currencies on global markets. This is despite the Australian economy only being the 14th largest in the world.

This means that the fortunes of the Australian mining industry have an outsized impact on global economic developments. As historical data has shown, there is a close correlation between mining activity and the strength of the AUD.

If one was to look at the mining boom that dominated economic headlines in the first decade of the 21st century, the rise of mining exports correlates strongly with the steady rise in the value of the AUD relative to the USD and other currencies.

Much of this is due to the rising prices of extracted resources throughout this period. Another factor was surging demand, which caused the mining boom to raise Australian household incomes by around 13 per cent between 2003 and 2013.

Source: Pixabay

 

On one level, the mining industry helped fuel a boom time for the Aussie economy as a whole. This, in turn, raised investor confidence in the Aussie economy and helped contribute to its global reputation.

This is aptly demonstrated by the decision of the credit agency Fitch to raise Australia’s credit rating from Aa to AAA in 2011.

The strong demand from Asian economic giants such as China, Japan, and South Korea for Australian mining exports such as coal and metals has also helped prop up the value of the Aussie dollar. However, this can also be a double-edged sword.

Even minor drops in sales can have a significant impact. Take for example the arrival of Cyclone Debbie in 2017, which greatly reduced the capacity of the mining industry to export their products.

This, in turn, had a direct impact on the value of the AUD. It shaved several percentage points of its value in the immediate aftermath of the cyclone.

Conversely, the value of the Aussie dollar also has a strong influence on the fortunes of the mining industry.

This is mostly because, on global commodities markets, all commodities from the mining industry are sold in US dollars.

That means that a weak AUD is good news for domestic mining companies, as they get more Aussie dollars back from the US dollars that they receive. 

Ultimately, as long as extractive industries remain one of the largest sectors of the Australian economy, its impact on Australian currency will remain strong.

Whether this changes in the coming decades, as renewables displace many of Australia’s mining exports, remains to be seen. 

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