Yahoo Finance Australia’s international trade continues to boom: What it means
Amid the general gloom on the economy, there is one area that is tremendously positive – Australia’s international trade position.
$5.7 billion – that’s Australia’s trade surplus in May.
It is a new record level for a monthly trade surplus and reflects a boom in export receipts and relative weakness in imports as the slowing domestic economy impacts local demand for foreign produced goods and services.
Related article: RBA cuts interest rates AGAIN, to new record low
Related article: It’s time to end the “strong economy” propaganda
Related article: What would rescue the Australian economy?
Importantly, the $5.7 billion surplus is not a one-month wonder. Australia has recorded international trade surpluses over the past 17 months, with surpluses in the $4 billion to $6 billion range for six straight months.
Over the last 12 months, the trade surpluses have totalled a record of more than $43 billion.
Importantly, there is little on the horizon to suggest this fantastic trade position will turn lower.
This will provide a much needed shot in the arm for the economy at a time when consumer spending and housing are weak.
Delivering the bulk of the supercharged export receipts are the unexpectedly strong commodity prices. These prices are creating a cash windfall for many mining and resources companies. The export phase of the natural gas projects continues to emerge, which is broadening the base of commodities that are important to the export side of the Australian economy.
The chunky trade surpluses indicate that the level of the Australian dollar is strongly in Australia’s favour. In other words, the Aussie dollar looks under valued.
For close to a year, the dollar has been in a range a few cents around US 72 cents despite the favourable commodity price cycle. It recently dipped below US 70 cents. Around these levels, exporters are clearly competitive and are taking advantage of their competitive position.
The Aussie dollar also looks to be in for a period of stability before it beaks to the high side over the next 3 to 6 months. The trade position and buoyant commodity prices should be reasons to expect the Aussie dollar to rise, even though the negative interest rate gap with the US is expected to continue at least in the short term.
These two factors – the outlook for commodity prices and interest rate differentials – point to broadly positive influence for the Aussie dollar late in 2019 and into 2020.
One reason why the Aussie dollar has in the past been flat to weaker from 2018 and the first half of 2019 was the move in Australian interest rates to levels well below those in the US. Official interest rates, for example, are now 150 basis points lower in Australia than in the US: 1.0 per cent versus 2.5 per cent.
This differential makes Australian dollar asset less attractive to global investors, hence the general flat or negative trend in the local currency.
The fact that Australian interest rate are above those in Europe and Japan is a positive for the Aussie dollar and partly offset the gap relative to the US.
The case for a pick up in the Australian dollar over the medium term is based on the interest rate gap moving back in Australia’s favour. If, as is likely, the US Federal Reserve embarks on an interest rate cutting cycle which sees US rates cut to 1.5 per cent or less while the RBA leaves rates steady at 1.0 per cent, the rate gap will be less of a negative to Australia.
Even at US 75 cents, Australian exports should still be competitive and sustained the remarkable export performance.
Either way, Australia looks set to be in for an era of sizable surpluses on international trade with commodity exports booming and import growth remaining subdued.
It is a rare positive aspect of the economy and if it is sustained, it will keep a solid floor under Australian economic growth which will then be complemented by the effects of recent interest rate and tax cuts.
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, property and tech news.
