By Michael McCarthy, Chief Market Strategist, CMC Markets The Australian dollar (AUD) is grouped with the commodity currencies. Australia’s international trade is dominated by iron ore, coal, natural gas, gold, alumina and agricultural products. Down drafts in prices for these commodities are a significant drag on the AUD. Ongoing weakness in commodity prices could see the AUD/USD cross drop below recent five year lows. While mining output and energy production account for around 14% of Australian GDP, they constitute well over half of all exports by value. The bulk of these mineral exports, as well as farm produce, are now shipped to China. In January 2015, two way trade between Australia and China hit $11.5 billion AUD per month. For Australia, this figure was more than double that of the next largest trade partner, Japan, and more than triple the value of trade with the USA. A slowing China economy represents a double threat to the health of the Australian economy and currency. Weaker commodity demand from the world’s fastest growing major economy is compounded by the impact on direct trade – lower prices and potentially lower volumes. AUD/USD falls so far are dramatic: Source: CMC Markets Deteriorating terms of trade continue to drive the AUD lower, despite a higher interest rate regime than most developed nations. One of the factors driving oil, iron ore and coal prices lower is the unconventional reaction of key global suppliers. Rather than cut production in the light of falling commodity prices, they have maintained, and in some cases increased, output. Whether its Saudi Arabia in oil, or BHP, Rio and Vale in iron ore, they appear willing to sacrifice short term profitability for a long term structural gain – driving higher cost producers out of their respective markets. Combined with an outlook for a stronger USD, this could mean a lower for longer bottoming of the commodity price cycle, and substantially lower levels for AUD/USD. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.