Weekly Market & Currency Developments – From Our Bankers

Trade surplus soars; US trade near record lows

International trade

Trade surplus: The trade surplus rose from $725 million in May (previously $827 million) to $1,873 million in June. It was the 11th surplus in 13 months.

Net exports: Net exports (exports less imports) is expected to add 0.1 percentage point to economic growth in the June quarter.

Trade with the US: US exports and imports account for just 6.7 per cent of Australia’s total trade in goods – just a smidgen off all-time lows.

The trade data has the potential to affect the Aussie dollar so it may be important for exporters and importers.

What does it all mean?

• Australia continues to pay its way in the world, with the on-going trade surpluses acting as a fundamental support for the currency. The trade surplus may narrow in coming months due to the drought but any softening is from a position of strength.

• When was the last time that Australia had a trade surplus, economic growth near 3 per cent, low inflation near 2 per cent, low unemployment just over 5 per cent and a budget deficit that is shrinking and around 1 per cent of GDP? It is hard to find fault with our economic circumstances.

• US President Donald Trump would have few concerns with the US-Australia trade imbalance. It is in the US favour by $18 billion over 2017/18. By contrast Australia’s trade surplus with China stands at almost $38 billion.

• The US has become far less important to Australia in terms of international trade. US export and import of goods account for just 6.7 per cent of Australia’s total trade in goods – just slightly off all-time lows. By comparison China accounts for 28 per cent of Australia’s total 2-way trade.

What do the figures show?

International trade

• The trade surplus rose from $725 million in May (previously $827 million) to $1,873 million in June. It was the 11th surplus in 13 months. The rolling annual surplus rose from $4.848 billion to $6.281 billion.

• The net services deficit narrowed from $347 million to a 12-month low of $238 million.

• Exports of goods and services rose by 2.6 per cent (goods rose by 2.9 per cent).

• Imports of goods and services fell by 0.7 per cent (goods fell by 0.8 per cent).

• Exports were up by 12.9 per cent on a year ago, while imports are up 10.4 per cent.

• Rural exports rose by 4.6 per cent – the fourth gain in five months. Non-rural goods rose by 2.4 per cent. Gold exports rose by 5.6 per cent after rising by 22.4 per cent in April.

• Exports were driven by “other rural”, up $98 million; cereal grains up $67m; metal ores and minerals, up $118m; “other non-rural (incl. sugar and beverages)”, up $117m; “other manufactures”, up $109m; gold, up $104m; and travel credits, up $90m.

• Within imports, consumer imports fell by 0.2 per cent; capital goods imports rose by 5.0 per cent and intermediate goods imports fell by 3.6 per cent.

• Consumption goods imports were up by 5.5 per cent on a year ago while capital goods imports were up by 11.7 per cent and intermediate goods imports were up by 19.2 per cent.

• Australia’s annual exports to China rose from US$102.51 billion in May to US$105.44 billion in June – a new record high. Exports to China are up 11 per cent on a year ago. Exports to China account for 33.6 per cent of Australia’s total exports, just off record highs.

• Australia’s annual imports from China rose from US$66.82 billion to US$67.74 billion – a record high. Annual imports were up by 10.9 per cent on a year ago. Imports from China accounted for 22.5 per cent of Australia’s total imports, down from a record 23.45 per cent in April 2017.

• Australia’s rolling annual trade surplus with China rose from $35.69 billion to $37.70 billion.

• Australia’s rolling annual trade deficit with the US narrowed from $18.27 billion to $18.05 billion. Imports from the US account for just 9.9 per cent of total imports – the lowest share in 30 years of records.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

What are the implications for interest rates and investors?

• The trade data has no implications for interest rate settings. CommSec expects rate settings to remain unchanged over 2018.

• The solid position of our trade accounts would be viewed positively by foreign investors and thus provide support to the Aussie dollar. But interest rate differentials and export prices have the main influence on the value of our currency.

Investor Signposts: Week Beginning August 5 2018

Australia: The Reserve Bank dominates the agenda

• The Reserve Bank dominates the local agenda in the coming week. In overseas markets, inflation data is in focus in both the US and China.

• The week kicks off on Monday with the release of the ANZ measure of job advertisements. Job ads have been choppy in recent months. In June, ads fell 1.7 per cent from 7-year highs after rising by 1.4 per cent in May. Job ads are still up 6.9 per cent on a year ago. The number of jobs advertised (seasonally adjusted) was 175,660 in June while the trend level of job ads stood at a 7-year high of 177,692.

• On Tuesday, the Reserve Bank Board meets to decide interest rate settings. The last move in rates was two years ago in August 2016. And given the recent tame inflation data, the period of inaction on rates should continue.

• The Performance of Construction index is also released on Tuesday.

• On Wednesday, the Australian Bureau of Statistics (ABS) will release the June data on housing finance.

• In May the number of loans (commitments) by home owners (owner-occupiers) rose by 1.1 per cent – the first increase in six months. And the value of new housing commitments (owner occupier and investment) rose by 0.5 per cent. Owner-occupier loans rose by 0.7 per cent and investment loans fell by 0.1 per cent.

• Based on data from the Bankers Association, the value of home loans may have fallen by 1 per cent in June, signalling a flattening of home loan demand.

• Also on Wednesday the Reserve Bank Governor, Philip Lowe, delivers a speech to the Anika Foundation lunch in Sydney. The title of the speech is “Demographic Change and Recent Monetary Policy”. The Reserve Bank Governor will no doubt provide some top-level views given the recent tame inflation data and then these will be fleshed out on Friday with the monetary policy statement.

• That quarterly Statement on Monetary Policy will be released at 11.30am Sydney time on Friday. The main focus will be the forecasts on inflation and economic growth (GDP) but no major changes are expected.

• Also on Friday, the ABS will release the June lending finance figures. This data covers not just new home loan commitments but commercial, personal and lease loans.

• In May, total new lending commitments (housing, personal, commercial and lease finance) fell by 1.4 per cent to $67.4 billion. Commitments are down by 1.5 per cent on the year. In trend terms, lending fell for the fifth straight month, down by 1.3 per cent in May.

Overseas: Inflation in the spotlight

• Inflation figures will be released in the US and China over the week. The sensitive Chinese international trade data (exports and imports) is also issued.

• The week kicks off on Tuesday in the US when the JOLTS data is released – the Job Openings and Labour Turnover Survey. This survey is conducted by the Bureau of Labour Statistics and attempts to measure the level of labour demand or job vacancies. Vacancies eased by 202,000 in May but this was from record levels – the 6.64 million jobs waiting to be filled remains significant.

• Also on Tuesday consumer credit data is released in the US. And the regular weekly data on chain store sales is issued.

• On Wednesday in China, international data is issued. In June, exports were up by 11.3 per cent on a year ago with imports up 14.1 per cent. The trade surplus stood at US$41.6 billion. In July, economists expect that imports rose at a 20.8 per cent annual rate with exports up 10 per cent. Greater imports from the US combined with a smaller trade surplus would be viewed positively by White House officials.

• On Wednesday in the US, the regular weekly data on new mortgage applications is issued.

• On Thursday in China, data on consumer and producer prices is expected. Consumer prices are currently up 1.9 per cent on a year earlier with producer prices up 4.7 per cent – the latter boosted by higher commodity prices, especially petroleum products.

• The US data on producer prices will be released on Thursday with data on wholesale inventories. The data on consumer prices is issued on Friday.

• Also on Friday in the US is the monthly data on the federal budget (for the month of July). In China the July data on vehicle sales will be released.

Financial markets

• The Australian earnings season gets underway in earnest in the coming week.

• Amongst companies expected to report earnings on Tuesday are: Reckon, Capilano Honey, IOOF Holdings Limited, Navitas Ltd, Shopping Centres Property Group, Transurban Group.

• On Wednesday: Skycity Entertainment Group, AMP, CBA, Tabcorp Holdings.

• On Thursday: AGL Energy, Crown Resorts, Magellan Financial Group, Mirvac, Suncorp.

• On Friday: Aventus Retail Property Fund, Baby Bunting Group, Charter Hall Long Wale REIT.

Weekly Global Currency Outlook

• USD will be supported by the escalating trade frictions with China. We expect the US July CPI to track higher to 3.0%/yr.  The gradual improvement in wages suggest upside risks to core CPI. While a rate hike by the FOMC in September is almost fully priced, a hike in December is only about 60% priced. A strong core CPI can lift US interest rates, particularly for a December hike, and lift the USD.

• AUD/USD may receive some support from the various RBA events this week. At Tuesday’s policy meeting, we expect the RBA will send a positive economic message and indicate the next move in the cash rate is more likely to be up than down. Higher oil prices could see the RBA nudge its headline CPI forecasts higher in the near term but leave the underlying CPI forecasts unchanged in Friday’s Statement on Monetary Policy. But the force of a strengthening USD will be a headwind to AUD breaking out of its 0.73‑0.75 range.

• NZD/USD will remain heavy. New Zealand economists expect the RBNZ to keep the cash rate at 1.75%. The main message from the RBNZ will be a tightening cycle remains distant; and a preparedness to move the cash rate up or down. We expect the RBNZ to project medium‑term inflation pressures will build more slowly than previously anticipated, bearing down on NZD and supporting AUD/NZD.

• USD/JPY and AUD/JPY can ease further if yields on Japanese government ten year bonds keep rising. The Bank of Japan Governor indicated a tolerance for yields on ten year JGBs to fluctuate +/‑0.20% around 0.0% (currently: 0.11%)

• USD/CNH and USD/CNH will remain firm this week, reflecting heightened US‑China trade tensions. On Friday, Chinese policy makers announced their intention to apply tariffs on US$60 billion worth of US goods imports. PBoC also increased deposits on CNH forward positions to 20%, indicating unease with speculative pressure/outflows.

• USD/CAD has scope to recover a bit on broad USD strength.  But CAD can continue to outperform AUD.  Rising expectations for an October Bank of Canada 25bps interest rate hike (65% priced‑in) can support CAD. On Friday, leading indicators point to upside risk to Canadian jobs and earnings growth in July.

• GBP/USD will consolidate over the coming week, with downside risks. Last week’s BoE meeting left investors in no doubt that the BoE’s rate hiking cycle will be prolonged and limited.  The BoE’s believe it will raise rates by only 75bps over the next three years.

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