China calling, Aussie falling

To begin with, let’s take a brief look at the International Trade in Goods and Services report released by Australian Bureau of Statistics (ABS), most commonly referred to as the Trade Balance. In short, it measures Australia’s debits (imports) and credits (exports) with the rest of the world.

Last week’s ABS release showed a September deficit (more debits than credits) of $A284 million which was the smallest deficit since March and a vast improvement from a year ago when it stood at a massive $2.7 billion. But let’s take a look a little closer at the numbers and see what they tell us about trade relations with our biggest business partner.

Is China still calling?

Well, to start with, the total value of Australian exports to all countries around the world rose by 0.5% following a 3.5% increase the previous month, to be 15% higher than they were 12 months ago. I am sure this next piece of information, however, is music to a China bulls’ ears – the seasonally adjusted value of export sales to China hit a new record high of AUD $8.9 billion – a whopping 50% increase from a year ago!

Doesn’t look like a sign that Chinese demand for our exports is diminishing as many have stated, and it’s not hard to guess where the export growth is coming from with iron ore volumes reported to be up 27% on the year. So China is still calling on Australia for its resources.

Such demand should only serve to increase demand for Australian dollars given that either the purchaser or the receiver of payment will have to, at some point, convert the currency back into AUD.

So why is the Aussie falling?

Given the impressive China export growth numbers over the last year, one would expect the Aussie dollar to be higher than it was a year ago, but this is not the case. In fact, the currency is around 10% lower than it was in September 2012.

Whilst China is important, it is not the only consideration, especially given the value of a currency is relative and can be influenced by a whole lot of other variables. So this means that other factors, such as the performance of the Australian and US economies and movements in the US dollar play a massive role in the exchange rate. Simply making the link between continued Chinese demand and a higher Australian dollar, as many like to do, does not always correlate directly.

If we go back to the Trade Balance report and look at the other side of the ledger, the debits, which come from imported goods and services, show a different picture for the Australian economy. Over the same period in September where exports grew 0.5% the total value of imports fell by 1%, and are only up 4% on the year compared to a 15% increase in exports over the same period. So in the last year as the global economy has improved somewhat the Australian economy is still rather sluggish.

It is clear looking at Trade Balance data that domestic demand for imported products is soft, a sign of a slowing Australian economy. The RBA has been cutting interest rates and at the same time the US dollar has strengthened – all of these factors combined have pushed the Aussie dollar lower despite increase in export demand

Will the currency trend continue in 2014?

It appears to me the Australian dollar will continue to underperform in 2014 as it has in 2013. The factors mentioned above, in particular US dollar strength, are likely to persist so even if China continues to increase its demand for our exports the currency may struggle to maintain upside momentum.

In addition, with rising inflation and tougher capital control amongst its banks there are signs the People’s Bank of China will tighten monetary conditions. This puts the growth trajectory at risk and may eventually mean China stops calling.

Jim Vrondas is chief currency and payment strategist, Asia-Pacific at OzForex, Australia’s leading international money transfer service. OzForex’s cutting edge technology powers foreign exchange services for 100,000 private and institutional clients across six continents, and the company is a key provider of forex news.