Wednesday, October 3, 2012

Spike in Australian trade deficit points to AUD's vulnerability

In another sign of the Australian dollar's continued susceptibility to a correction (discussed here), the latest economic numbers from down under show a sharply rising trade deficit. The only factor that is keeping AUD from further declines is the expansionary monetary policy in the US.
WSJ: - Data showing that Australia's trade deficit unexpectedly blew out in August sent the Australian dollar to a four-week low Wednesday, with further losses likely as traders ramp up bets on further interest rate cuts.

A slump in prices paid for key commodities, such as iron ore and coal, meant Australia returned a A$2.03 billion deficit in August, its worst performance since March 2008 and much wider than the A$685 million that economists had expected.
"The Australian dollar has found very few friends in the currency market over the last few days, except for some bargain hunters thinking the AUD's quick fall from grace has made it a good value proposition at the current levels," said Tim Waterer, a dealer at CMC Markets.
What's particularly troubling is that the forecasters completely missed the size of this deficit number - as shown in the chart below. This may be pointing to greater declines in Australia's trade with China than economists have assumed.

Australia Trade Balance Goods & Services (Bloomberg)
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