THE TAKEAWAY: Australian trade deficit widened in November > High exchange rate key driver behind deficit > AUDUSD traded lower
The Australian dollar traded slightly lower versus the U.S. dollar as the Australian trade balance widened by -2.637 billion Aussie dollars in November, down from -2.443 billion Aussie dollars in October. Although exports increased by 1.17 percent, imports increased by a greater 1.78 percent resulting in a net outflow of -2.637 billion Aussie dollars exiting the economic region.
Upon glancing at the chart below, a stronger exchange rate increases import buying power and makes for Aussie exports to come at a greater cost to foreign consumers which results in trade deficits. RBA policy members had recently stated in their December Minutes that the currency remains a “high level” which is likely to weigh on exports.
Forex traders likely sold the currency as widening trade deficits may tempt the central bank to reduce interest rates in an attempt to weaken the Aussie. However, such a measure should reduce the high-yielder’s attractiveness as traders look to the Australian dollar to earn profits from carry interest. Currently markets appear to be pricing in a 38 percent probability of a 25 basis point reduction in rates by the RBA during the next meeting on February 5.