Given the country´s vast natural resources, the Australian dollar has long been labelled as a commodity currency. A sizeable movement in the price of iron ore could have just as much impact on the nation´s currency as a change in monetary policy.
In fact, the two parameters appear to have been highly inter-related in recent years. Subdued commodity prices have meant that the Reserve Bank of Australia (RBA) has needed to worry less about inflation as the boom in the mining sector has cooled.
At its meeting on Tuesday this week, the RBA plumped to leave interest rates on hold yet again, noting that inflation remained subdued despite strength in the domestic jobs market and a buoyant global economy.
Since contracting in the third quarter of 2016 for the first time in five and a half years, accommodative monetary policy has helped the Australian economy to grow.
Australia expanded by 0.8% in the second quarter of this year versus growth of just 0.3% for the first three months of 2017.
The relationship between the Australian dollar and the price of iron ore is often cited.
Australia´s mining of iron ore on a mammoth scale means there has tended to be a very strong, positive correlation between prices of the metal and the country´s exchange rate.
It´s a similar story for Canada, which has long witnessed the fortunes of its dollar being inextricably linked to the price of crude oil.
As the world´s largest exporter of iron ore, higher prices rapidly translate into increased demand for Australian dollars.
Of course, the reverse tends to be the case when prices fall.
In 2011, when iron ore reached an all-time high of $191.9 per tonne, the Australian dollar was trading at 0.98 Australian cents to one US dollar.
Today, with iron ore at around $63 per tonne, Australia´s currency is trading at AUD1.31.
While iron ore prices have dropped by 67% over the period, the Aussie dollar has lost around 34% versus the US dollar.
Meanwhile, Australian interest rates have fallen from 4.75% to 1.5%, having been set at this record low since August 2016.
Since February 2011, the Aussie dollar has also fallen by about 13% against the euro, moving from AUD 1.34 to AUD 1.52.
While the country is also a producer of other commodities such as gold, oil, diamonds, nickel, uranium and coal, iron ore accounted for around 16% of Australian exports last year.
Iron ore has tended to crowd out Australia´s manufacturing sectors; when prices for commodities such as iron ore are particularly high, the corresponding currency strength tends to make other segments of the economy less competitive.
The phenomenon where export industries are hobbled by high currency exchange rates due to evelevated commodity prices is commonly termed as "Dutch disease".
For this reason, more subdued prices for commodities such as iron ore could actually prove to be beneficial for the Australian economy over the long run.
A lower exchange rate could translate into higher demand for Australia´s non-mining sectors, ultimately resulting in a more balanced economy.
The problem for Australia though is that it does not have much if any control over iron ore prices.
Policymakers in Beijing hold much greater sway over such matters.
Iron ore prices slumped to a low of $40 per tonne by the end of 2015 as demand waned on the back of Chinese economic weakness.
While prices have strengthened by around 50% since the beginning of 2016 as the Chinese economy has improved, action by the Chinese authorities is expected to put a damper on iron ore prices over the coming months.
With the aim of cutting down on pollution, the Chinese authorities have ordered the closure of various steel production facilities over the winter months, a factor that should curtail demand for iron ore.
In the longer-term of course, China will remain an important consumer of iron ore. But as it enters a more mature phase of its economic development, the halcyon days when the metal was trading at a little below $200 per tonne appear to be well and truly over.
Another major factor in the Australian dollar´s performance over the years has been the so-called “carry trade”.
For some time, traders have tended to sell yen and reinvest the proceeds in higher yielding Australian dollars.
While Australian interest rates are still much higher than Japan´s current 0.1% rate, this particular carry trade looks set to diminish over the coming years.
With the Japanese economy appearing to be on a firmer footing than it has for some time, and commodities likely to provide a weaker impetus to the Australian economy than they have done in the past, the carry trade could become ever less attractive, depressing the Australian dollar further.
Over the coming years, we should expect to see the Australian dollar behave less like a commodity currency and more like a normal, developed currency.
A more stable exchange rate could have positive implications for non-mining sectors of the economy and lessen some of the dilemmas commonly faced by the RBA.
The RBA reduced interest rates to a record low as it sought to prop up the Australian economy in the face of a huge downdraft in commodity prices.
Nevertheless, its interest rate of 1.5% still compares relatively favourably with the likes of the US, eurozone and UK, where rates currently stand at 1.25%, 0% and 0.5% respectively.
With the US economy gathering steam and the Federal Reserve likely to continue its interest rate tightening cycle, with the next rate hike expected as early as next month, the Australian dollar looks susceptible to further weakness against its US counterpart.