Australia: External position strongest in over 35 years - AmpGFX

In view of Greg Gibbs, Analyst at Amplifying Global FX Capital, Australia has achieved a significant improvement in its external balances, over the last year, moving from a merchandise (goods) balance deficit of around 1.5 to 2.0% of GDP to a surplus of 1.7% in May, while both New Zealand and Canada remain in deficit.

Key Quotes

“Including services, improves the position of New Zealand with a services surplus of 1.5% in Q1, helping offset its goods deficit, but still leaving it with a G+S deficit in Q1 of 0.3% of GDP.  Canada, on the other hand, has a significant services deficit of 1.2% of GDP, generating a G+S deficit in Q1 of 1.6% of GDP.  Australia has relatively balanced services trade, and its G+S balance was 2.1% in Q1 of GDP, and 1.7% in May.”

“The Australian external position remains highly variable and dependent on commodity prices.  However, following the mining investment boom that peaked in 2013, it is now showing up in stronger net exports and a narrower deficit.”

“The overall current account balances, incorporating significant deficits in income payments, remain in deficit for all three countries.  Although in Q1, the Australian deficit has narrowed to a relatively small 0.7% of GDP; its narrowest since 1979.  The New Zealand deficit was 4.2% of GDP in Q1 and Canada’s was 3.1% of GDP.”

“New Zealand may be benefiting from higher commodity prices, but its net export performance has shown little clear improvement.  In part this may reflect above average economic growth supported by rapid immigration, boosting import growth.  But it also suggests that the exchange rate may be high enough to be dampening exports and boosting imports, diverting demand offshore and lowering domestic inflation.”

“The New Zealand balance of payment deficit suggests that it still needs to offer a relatively high level of real interest rates to stabilize the exchange rate.”

“Interestingly, Canada has only recently closed its 2yr swap rate gap with the USA after its recent rate rise.  The interest rate gap has perhaps become more important for the CAD since it has moved to a current account deficit more frequently since the Global Financial Crisis.”

“On the other hand, interest rate differentials appear to be playing a lesser role in currency direction for many other currencies in the last year, including Australia and New Zealand.”