Australian Dollar Retreats Ahead of Widening Trade Deficit

Strategic Insights -

The Australian dollar retreated on January 10 as investors sold off the currency ahead of the release of the trade deficit data. At 1200 AEDT, the local unit was trading at $US0.7514/19, lower than yesterday's close of 0.7530/35. Deutsche Bank's foreign exchange strategist, John Horner, attributed the decline to anticipation of a wider trade deficit. "We have seen the Australian dollar weaker all morning in anticipation that we would see a wider trade deficit," he said.

Key Takeaways:

  • The Australian dollar retreated on January 10, trading at $US0.7514/19 at 1200 AEDT, lower than yesterday's close of 0.7530/35.
  • The decline was attributed to anticipation of a widening trade deficit, with John Horner stating that the local unit had eased slightly ahead of the trade balance data release.
  • The Australian November trade balance on goods and services recorded a deficit of $2.46 billion, seasonally adjusted, up from an upwardly revised deficit of $1.38 billion in October.
  • Exports increased by 1.0 per cent in adjusted terms, while imports soared by 7.0 per cent in November, with Mr. Horner attributing the significantly higher November read to a "one-off quirk" due to changes in the customs processing system.
  • John Horner expects the Australian dollar to remain well-supported by market sentiment, despite the widening trade deficit, as an end to the US Fed interest rate tightening cycle is not far off.
  • The US Fed has raised interest rates to 4.25 per cent in 13 small steps dating back to June 2004, with the next meeting scheduled for January 31.

Statistics:

  • The Australian dollar on the Reserve Bank of Australia's trade weighed index (TWI) was 63.4 points at 1200 AEDT, from 63.3 points at yesterday's close.
  • The November trade deficit was $2.46 billion, seasonally adjusted, up from $1.38 billion in October.
  • Exports increased by 1.0 per cent in adjusted terms, while imports surged by 7.0 per cent in November.

Sources:

  • Asia Pulse, January 10
  • Australian Bureau of Statistics
  • Deutsche Bank
  • Reserve Bank of Australia (RBA)