Australian Dollar Rises after Trade Surplus Seen Holding Ground Despite Pressures

Expectations of a stronger trade surplus can help to support the Australian Dollar against other currencies at a time when the onward march of other central banks, and an RBA that is seen on a road to nowhere, are set to act as a headwind for the Aussie currency.

The Australian Dollar rose during morning trading in London Thursday after data showed the Aussie trade surplus widening further than was expected, while one strategist is now suggesting it could continue to hold its ground despite likely pressures from slower Chinese commodity demand.

Australia’s trade surplus rose from $0.87 billion to $1.75 billion during September when economists had forecast a much smaller increase to $1.42 billion, which lifted the Dollar overnight and into the London session.

“We expect the trade balance to remain in a surplus position for the next few years,” says Kristina Clifton, a senior economist at Commonwealth Bank of Australia.

Surging iron ore exports were behind September’s outsized increase in the surplus, with higher iron ore prices conspiring with increased shipments to boost the value of international raw materials exports.

The increasingly important services balance also added to the surplus with service imports falling and exports rising, translating into a surplus of around $201 million.

“Commodity prices should drift lower as the Chinese government focuses more on environmental protection at the expense of slower growth. This will be a drag on the trade balance,” Clifton notes. “But there are two main offsetting forces.”

The Pound-to-Australian-Dollar rate was quoted 0.51% lower at 1.7176 during morning trading in London.

Chart showing the Pound-to-Australian-Dollar rate over hourly intervals.

“Firstly, LNG exports are still rising. LNG exports volumes are projected to increase by around 25% in 2017/18 and then by a further 16% in 2018/19,” Clifton says.

LNG exports are relatively new source of trade for Australia although, while China still represents one of the larger export destinations, both Japan and South Korea also feature as sizeable export markets for LNG.

Taiwan and India are also important emerging markets for LNG, according to data from the Australian Petroleum Production and Exploration Association (APPEA), which places Japan as Australia’s largest LNG market.

“Secondly, the services surplus should continue to increase over time with the growing middle class in China boosting our tourism and education exports,” Clifton adds.

Expectations of a stronger trade surplus can help to support the Australian Dollar against other currencies at a time when the onward march of other central banks, and an RBA that is seen on the road to nowhere, are set to act as a headwind for the Aussie currency.

The AUD/USD rate extended earlier gains Thursday, rising 0.36% to 0.7704, taking its 2017 return to 6.9%. But some strategists have questioned how much further the Antipodean currency can go over the near term.  

Chart showing the AUD/USD rate over hourly intervals.

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“With the three monthly trade figures for Q3 now available we can firm up our forecasts for the Q3 current account and the net exports contribution to GDP,” Clifton writes, in a Thursday note.

Clifton forecasts a modestly wider current account deficit for Australia in the third quarter, of around $10.2 billion, which is equivalent to around 2.3% of GDP. Meanwhile, net exports stand to add around 10 basis points to third quarter GDP growth.

“With last week’s inflation print disappointing forecasts and failing to accelerate, the risk for markets is that the RBA’s “on hold” stance continues to bleed into the short term interest rate curve and price out rate hikes even further into the future as time goes on,” Honglin Jiang, a currency strategist at Credit Suisse, wrote in a note Wednesday.

Jian has cut her Australian Dollar forecasts after data released last week showed inflation rising at an annualised rate of 1.8%, a disappointment for markets given economists had forecast headline inflation to return to the lower bound of its 2% - 3% target for the first time in two years.

Core inflation, which removes many of the more volatile items from the consumer price basket, was equally disappointing, suggesting that underlying inflation pressures remain missing in action down-under.

Markets had been, and to some extent still are, betting that the Reserve Bank of Australia will follow other central banks along the path to policy normalisation in the New Year by hiking interest rates. 

“We had previously argued on September 13 that with the RBA firmly on hold and in no mood to countenance market speculation of blindly following its global peers into a tightening cycle, investors would be best served seeking opportunities elsewhere,” Jiang recalls.

Dollar bulls caught on the hop by weaker than expected inflation and sightings of the RBA on a road to nowhere may, therefore, welcome any suggestion that the Australian trade surplus can hold its own during the years ahead. 

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