Australia's largest trading partner is China. Throughout the mining boom, they were our best customer. While data regarding the Chinese economy is difficult to validate, there is no hiding the fact that they are buying less raw materials from Australia. This is bad news for the mining sector. Deteriorating terms of trade with China, will have a knock on effect that will impact the entire economy.

AUD Foreign Exchange Rate

If China is buying less raw materials from us, then this causes a reduction in total Australian exports. This will cause the Australian Dollar to depreciate. Exports represent demand for a currency. China was buying raw materials from Australia, and paying in Australian Dollars. This stimulated the Australian Dollar in its epic rise beyond parity with the US Dollar. Our long term outlook for the Australian Dollar: We expect to see the AUD fall below USD 70.00 by the end of 2015.

Before the mining boom, Australia was often referred to as a 'small open economy'. We tended to import more than we exported, causing our Balance of Payments and Current Account to be in deficit. Our dollar had the nickname 'The Aussie Battler'.

The equilibrium value of the Australian Dollar has increased due to the mining boom. Now that the boom is over, we expect that the AUD equilibrium will revert to levels below 100. A history of the AUD TWI equilibrium is shown below: