The Takeaway: Australia Trade Balance Report came in well above expectation -> Trade deficit may continue to narrow due to a stronger global demand -> AUD/USD rose
The AUD/USD edged higher on Australian Trade Balance that showed a narrowing trade deficit in December. The report posted a deficit of -427 million, increasing from a revised deficit of -2788 million in the prior reading, which came in well above expectation that set for a deficit of -800 billion. Exports increased by 2.6% in December versus a 1.3% in November while imports decreased by 6.2% versus an increase of 4.8% in November.
A narrowed trade deficit may signal a higher upside potential for Aussie as foreign demand increases. Moreover, the RBA index of commodity prices released on January 1 rose 2.6 percent on the preliminary estimates for January commodity prices; in particular, iron ore has exhibited the most increase while base metals and rural commodities have showed little change. Although there are concerns over China’s waning demand for commodities, economists at times may underestimate the power of economic resilience and multiplier effects in emerging countries like China.
In fact , China’s demand for iron ore and coal are likely to pick up strength after the Chinese Lunar New Year during the third week of February. In 2013, Chinese government has removed regulations on annual coal price negotiation between buyers and sellers, which implies that supplies are sufficient unless there are more natural disasters that were seen in Australia. More importantly, rise in coal prices may be limited. Therefore, aside from the yield advantage that the Aussie continues to offer, potential rising commodity prices and stronger global demand could further narrow the trade deficit and provide some support for the Aussie in the short term.
The AUD/USD rose 12 pips in the five minutes leading up to the announcement. At the time of writing, the AUD/USD is trading at 1.045.
AUD/USD 1-Minute Chart
Chart Created by Robin Leung using Marketscope 2.0