Aussie trade deficit adds to A woes

Yesterday’s rate cut by the Reserve Bank of Australia opened the door to more moves. Today’s trade data put further pressure on the Australian dollar as it struggles to hold $1.02 against the US dollar. We thought US$1.0280 would be tested but it seems to have broken through that level a little earlier than initially anticipated. We continue to hold the view that a drift back to parity will be met with solid support. Today’s trade data shows Australia’s trade deficit blew out to $2.027 billion when seasonally adjusted. It is the largest trade deficit recorded since March 2008 and highlights the impact of lower commodity prices on the national accounts. Market consensus was for a number close to $670m – so it is a very large miss.

Composition is important, exports fell by 3% while imports were only 1% lower. Bulk commodity price declines are starting to feed through into the national accounts, with iron ore and coal the most obvious. The fact that the net import number was not as low as expected also suggests consumption is holding up relatively well thanks to solid employment and a strong currency. Most of this is associated with growth in capital goods imports as mining investment ramps up, but not all of it is represented here. The trade numbers should improve in September given the recovery in iron ore prices from the lows in August and rising volumes from expansion.

Asian Development Bank downgrade

The Asian Development Bank (ADB) also downgraded its growth assumptions today, now forecasting Asia excluding Japan to grow its combined economy by 6.1% this year – the lowest pace of growth since 2009. Inflation was downgraded from 4.4% to 4.2% but the bank did note “if an extreme shock were to materialise, most economies in the region have room to use fiscal and monetary tools to respond”. ADB’s specific target rate for China is 7.7% this year, below its previous 8.2% forecast but still towards the upper end of market estimates, considering fresh doubts after ongoing negative PMI reads.

City Index remains bullish around Chinese prospects with our medium to long term view summarised in a prior note titled “Is the Chinese growth story over?”