Photographer: Ian Waldie/Bloomberg

Aussie’s Record Start to Get More Fuel From China Trade Bonanza

  • Surging exports, high iron price to boost government coffers
  • Fiscal drag on economy has been key concern for RBA governors

The Aussie dollar is doubling down on its best-ever start to a year as a record trade surplus points to extra government income that may reduce the fiscal drag that has plagued the world’s 12th-biggest economy.

The currency jumped to an almost three-month high Thursday after data showed the December trade surplus swelled to A$3.51 billion ($2.7 billion), more than 50 percent larger than any previous excess. The Aussie had already posted a 5.2 percent advance in January that was the most on record for the period, and is getting close to erasing the rout that came after Donald Trump’s Nov. 8 election win.

The trade bonanza -- spurred by the largest exports on record to China -- is good news for the Aussie because it signals the Australian Treasury’s coffers will be getting a welcome influx of income. The Reserve Bank of Australia has long called on the government to do more on the fiscal side to boost the nation’s economy, which grew in the September quarter at the slowest annual pace since 2009 even after policy makers cut the cash rate to an all-time low 1.5 percent. 

“This commodity price dynamic is transformational for Australia’s broader economic outlook -- putting the economy on track to record the largest trade surpluses,relative to the economy, since the 1970s, presenting upside risk to the AUD (in the near term),” Goldman Sachs Group Inc. analysts led by Tim Toohey wrote in a note. “We expect the RBA to start normalizing interest rates in February 2018 -- with the balance of risks skewed to an earlier move.”

The government can be expected to go on using the $55 per metric ton estimate for iron ore that underpinned its latest budget update in December, even though prices for the raw material delivered to China had jumped to $83.34 before the Lunar New Year holidays started Jan. 27. Windfall gains could be used used to pay down debt and allow Australia to protect its coveted AAA sovereign rating while being able to potentially consider spending increases instead of cuts.

The Aussie also may benefit from:

  • Positive inputs from improving terms of trade brought on by Fed-inspired USD strength; may see AUD/USD advance to the 0.7778 November high
    • Trade data saw limited reaction in local bond, OIS curves from trade data, with little chance of RBA hike seen until Nov. 2017 at earliest; resulting divergence with Fed curve should help protect Australia’s terms of trade
    • AUD/USD passed above 76.4% Fibonacci retracement of post-Trump drop from the Nov. high
    • CBA estimate increase in the terms of trade will boost nominal 4Q GDP by about 3%, according to note
  • Last Friday’s export-trade data showed export prices improved 12.4% q/q versus estimate 12.1%, led by iron ore, Australia’s biggest export
  • Relative strength indicator at 70 confirms strong conviction remains in current move; slow stochastic, though elevated at 77, has retraced from month’s highs

— With assistance by Masaki Kondo

    Before it's here, it's on the Bloomberg Terminal.