Trade Balance, Oil, And China Present Worries For The Australian Economy And Dollar

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Includes: FXA
by: Matthew Allbee

Summary

The Australian trade balance for December came in worse than expected at -3.54 billion AUD vs. -2.5 billion projection.

Oil and China are an important part of Australian trade. Weakness is bad news for the Australian dollar as well as the overall Aussie economy.

For those who believe oil will remain depressed and that the Chinese economy will slow, a short of the AUD may be a good way to play this.

Australia announced a trade deficit of (NYSEARCA:AUD) $3.54 billion for December, more than 40% higher than the expected value of $2.5 billion. Exports fell 5%, with import down 1%. Australia has been running fairly consistent trade deficits since the late 90s.

Oil is an important part of the Australian economy, and declining prices have obviously had ill-effects. This effect is part of the reason why the Aussie trade deficit has been deepening since 2014. More important to the Australian economy, though, are iron ore and coal exports. Both have seen falling prices since 2010.

Australia has also become increasingly intertwined with China through trade over the last 40 years. This has lead to the signing of the China-Australia Free Trade Agreement (ChAFTA). China is responsible for much of Australia's exports of iron ore and coal. Much of the demand for these goods is related to building Chinese infrastructure as well as use in manufacturing food and other goods.

Fears of a Chinese slowdown are, therefore, worrisome to Australian investors. Many fear the Chinese economy has overburdened itself with debt, which along with less and less catch-up required between itself and advanced economies to fuel growth, will cause it to slow over the coming years. As the two main Australian exports largely go towards projects sustained by China's growth rate, demand may slow in the future.

All of this has been causing downward pressure on the Australian Dollar, which has been in a decline against the USD since late 2013. With all it has going against it right now, you may still want to consider adding an AUD short to your portfolio if you believe oil will remain low or a Chinese slowdown is in the cards.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.