Why a higher Australian dollar isn't 'complicating' the economy's transition just yet

WILLIAM WEST / AFP /Getty Images

Australia is a mining nation, ensuring that when monthly trade data is released by the ABS, the first thing that many look at is the performance of its commodity exports.

However, perhaps it’s time to look beyond just what’s happening with iron ore, coal and LNG exports.

Almost by stealth, Australia’s services exports hit a record-high in October, rising by 2% to $6.212 billion.

To put that figure into perspective, the value of non-rural goods exports — including heavyweights iron ore, coal and LNG — totaled $16.224 billion in October.

Smaller, yes, but still a chunky part of Australia’s export jigsaw puzzle.

And, within the services figure, a large proportion comes from tourism and education exports, a key component within the economy which, along with commodity exports, public infrastructure investment and household consumption, has been tasked with helping to keep the economy humming as the mining CAPEX boom unwinds.

A big factor that has supported services exports in recent years has been the fall in the Australian dollar.

As seen in this chart from ANZ, there’s a strong inverse relationship between movements in the Australian dollar trade-weighted index (TWI) and net tourism and education exports between Australia and other nations.

Net exports is simply the value of exports for these categories less the value of imports.

Essentially, where the Aussie tends to lead, net tourism and education exports tend to follow.

Until now that is.

There’s been a noticeable divergence over the past year, disconnecting from the relationship seen over the past two decades.

While this could be the start of new trend with those studying and holidaying in Australia now less price sensitive to movements in the Aussie, there’s a risk that the gap between the two could converge once again.

As a lead indicator, the recent strength in the Aussie dollar suggests the risk is that the value of net tourism and education trade would decline, rather than the opposite outcome occurring.

It hasn’t happened yet, but it’s a risk, particularly should the strength in the Aussie persist.

For months the Reserve Bank of Australia has been warned that “an appreciating exchange rate could complicate” the economy’s economic transition.

As something that’s shown price sensitivity to currency fluctuations in the past, these export items could well be the ones to watch to determine whether or not this “complication” is occurring.

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