Australian bonds gain as trade deficit widens in October, next week’s FOMC decision in focus

The Australian government bonds gained Thursday after recent data showed that the country’s trade deficit widened in October. Also, investors await the next week’s FOMC final monetary policy decision for 2016.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 5 basis points to 2.75 percent, the yield on 15-year note dipped 6 basis points to 3.20 percent and the yield on short-term 2-year slid 1-1/2 basis points to 1.82 percent by 04:40 GMT.

The widening of the trade deficit in October was driven by higher imports, shrugging off the modest expansion in exports. The deficit came at 1.54 billion Australian dollar in October from an upwardly revised 1.27 billion Australian dollar in September. This was higher than the market expectations of deficit 800 billion Australian dollar.

Additionally, total exports rose a moderate 1 percent in October, dragging from previous 2 percent growth. After falling for three consecutive months, imports advanced 2 percent in October after declining 1 percent in September.

On Wednesday, the third-quarter GDP fell 0.5 percent q/q, registering the first biggest decline since global financial crises, from up 0.6 percent q/q in the previous quarter. Market had expected GDP to rise 0.3 percent. Additionally, yearly data rose 1.8 percent y/y, way lower than the market consensus of 2.2 percent y/y gain, from prior 3.3 percent.

Although the Australian economy contracted by 0.5% in the third quarter, this is very unlikely to be the start of a recession as GDP will most probably rebound in the fourth quarter. Nonetheless, this is only the fourth fall in GDP in 25 years, which highlights that the economic backdrop is not consistent with a big rise in underlying inflation, said Capital Economics in its research note.

Moreover, the Reserve Bank of Australia in its last monetary policy statement for 2016 left its benchmark interest rate steady at 1.50 percent after cutting twice in May and August. Also, the central bank in its monetary policy statement noted that steady policy rate is consistent with economic growth, inflation targets and global economy growing at lower than average pace.

Further, the central bank noted that the world’s second-largest economy has steadied and economic conditions in China supported by growth in infrastructure and property construction but medium-term risks remain. Also, mentioned that home prices rising briskly in some markets and global outlook for inflation more balanced than "for some time".

Lastly, the market will remain keen to focus on today’s European Central Bank (ECB) monetary policy meeting and next week’s Federal Reserve policy decision.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.28 percent higher at 5,544.50 by 04:50 GMT. While at 05:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index stood neutral at +61.71 (higher than +75 represents bullish trend).