FxWirePro: Widened AU trade balance cushions momentary relief to AUD slumps, RBA rate cut still weighs on Aussie crosses

Australia reported a trade gap of AUD3.19 billion in June of 2016, an increase of 32 pct from an upwardly revised AUD2.42 billion deficit in May and missing market estimates. It was the largest trade deficit since January as exports fell 1.0 pct to AUD25.80 billion while imports shot up 2.0 pct to AUD28.99 billion.

A drop in the value of resource exports (down 2.7% MoM) was the main factor behind the deterioration in the trade balance in June. Non-monetary gold exports (which are very volatile) were the prime drivers, dropping 15.5% MoM.

The major contributor to Aussie exports, the resource exports excluding non-monetary gold were largely unchanged (down 0.7% MoM in June). Metal ores and minerals (including iron ore) were down only 0.1% in June after a sharp increase in May. Coal exports also declined (down 5.5% MoM), but that only partially reversed the gain in the previous month.

Imports rose at a solid rate too – up 2% MoM – largely reflecting stronger imports of consumption goods (+7.4% MoM). Excluding volatile items, total goods imports jumped 3.6% MoM.

The rise in imports may be good news for the domestic economy as a whole as it may reflect higher households’ appetite for consumption.

The preliminary Q2 trade deficit was AUD7.98bn, slightly less than the AUD8.66bn deficit in the previous quarter.

The Australian dollar briefly dropped below 75 U.S. cents on the RBA’s rate cut by 25 basis points to 1.50 pct which was in line with forecasted.

The AUD managed to pare its losses, however, and was last up 0.1 pct at $0.7545, having slipped to as low as $0.7486 after the RBA decision.

Whether the RBA cuts interest rates further later this year is likely to hinge on moves in the Australian dollar.

Well, over the longer-term, we expect AU growth to remain subpar and AUD to drift lower. There are a few key things to watch in 2016. Governor Stevens retires in Sept 2016.

AU’s current account deficit is also worth tracking. While historically it has been easily financed thanks to Australia’s high-interest rates, it is back to 4.7%/GDP; FDI is slowing leaving Australia more reliant on portfolio flows. Reserve managers are no longer the AUD buyers they once were and AUD stands to lose more if China liquidates a larger portion of its reserves.