A Currency Rooted in Its Harvest Season: The Australian Dollar

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Australia is home to several economically important commodities, with the Australian dollar (AUD) being one of the world’s most robust ‘commodity currencies.’

The term’ commodity currency‘ refers to a currency linked to the price of commodities, such as grains and metals, that are heavily traded on global markets.

As an essential source of export cereals, meat, sugar, dairy produce, and fruit, Australia is well-placed to benefit from increased commodity prices due to its reliance on such goods.

This connection between Australia and its exports has made it one of the primary countries affected by changes in commodity prices and, by extension, the AUD.

The Australian dollar has a floating exchange rate, meaning that its value is determined by the demand for and supply of the currency in the global foreign exchange market.

This is because countries worldwide buy and sell AUD as an international currency to transact business with each other and pay for imports or exports.

According to RBA, “Commodity prices greatly influence the terms of trade (commodities are goods such as iron ore, natural gas, and agricultural products). This is because commodities account for a large share of Australia’s exports, so movements in commodity prices result in movements in export prices.”

The prices of commodities, such as critical exports like wheat, minerals, and livestock, primarily drive the value of AUD. This can be seen through the ‘harvest season’ effect.

When crop harvests are reasonable, it causes commodity prices to rise, which adds significant value to Australia’s exports, thus driving up demand for AUD.

On the contrary, bad harvests can cause a decrease in commodity prices which weakens demand for AUD.

Furthermore, because Australia is a major commodity-exporting country, shifts in global economic policies can cause rapid appreciation or depreciation of the Australian dollar against other currencies.

Overall, it is clear that commodities directly influence the Australian dollar’s exchange rate due to its reliance on them as export goods. Therefore when evaluating any movements in AUD exchange rates, one must consider what is happening with domestic and international policies, which could affect price changes of essential commodities within Australia.

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