Aussie Trade Balance: Possible Market Reaction

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Australia is having a pretty busy week. The RBA cut rates earlier this morning, and attention now turns to two major data points: trade balance and retail sales.

These releases have a habit of changing the course of the AUDUSD. It might be a bit too early to see the full effect of the first rate cut in the data, but these will be important reference points going forward to plot the course of the currency.

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What We Are Looking for Tonight

The first bit of major data to come across our radar will be the trade balance. Consensus expectations are for a balance of AUD5.25B. This would be up from the AUD4.87M of last month, and the highest on record.

The trade balance has been slipping over the last couple of months, as export growth slowed and imports picked up. Consumer demand has picked up lately, leading to the growth in imports of food, beverages and clothing. This was before the RBA cut rates, so many analysts expect a further increase in this item.

Sales Remain Good

Exports continue to expand, showing little sign of a lack of headroom. Growth in this item has been primarily led by iron ore prices, as the rest of the commodities have suffered due to the general lackluster growth in the world economy.

Commodity prices increased by 2.1%, after growing just 0.3% in May. During June, the spot price of iron ore went from $93.97 to reach as high as $112.90 by the end of the month. This is coming up on a doubling of the price since the cycle began in November.

The question now is at what point does the increased cost of iron ore cause a drop in sales? There is no consensus on where the price ceiling is since the largest customer is the notoriously opaque market of China.

The Future

There are two factors to consider to consider in projecting the price of iron ore, and thus the trade balance over the next few months. The first is how fast Brazil can bring its ore production back online. The second is the potential for increased demand if the trade dispute between the US and China is resolved soon.

Another factor that is often forgotten is Chinese investment in commodities as a hedge against inflation. With official figures showing a spike in inflation over the last quarter, it would be expected that Chinese savers will be increasing their investment in iron and copper.

All these factors influence the relative strength of the AUD and might help reverse the strong drop in capital flows that we saw in Q1.

Looking at the Domestic Market

Retail sales for June are projected to have increased by 0.2%. Although this would be positive. it is still barely an improvement from -0.1% in May. While this figure tends to bounce around a bit, we still need to see some substantial improvement if we are going to expect inflation to pick up in the future and stave off further action by the RBA.

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