Australia’s record trade surplus in June, swollen by strong Chinese demand for coal and iron ore, would seem to be positive for the Australian dollar. But investors must be cautious – it may be the peak of good news, says Geoffrey Yu, foreign exchange strategist at UBS.
He says Australia’s heavy reliance on exports of both commodities represents a big weak spot in the country’s economy. “Black coal alone represents around 23 per cent of Australia’s total exports according to official figures, while iron ore and concentrates are not far behind,” he says.
“Japan is Australia’s biggest customer for coal, and China for iron ore. Both countries have challenging economic outlooks and the signs are not encouraging.”
Mr Yu also points out that buying coal and iron ore is not the same thing as using it, and says there are signs that China’s inventories of both raw materials and finished goods are starting to rise.
“Even though China’s manufacturing purchasing managers’ index shows ongoing expansion, the inventories component moved towards contraction in July, and if current reports about overstock in commodities are true, this figure could decline further in coming months. The inventories component is a strong leading indicator for the Aussie dollar.
“Australia’s trade figures may start to disappoint in coming months as China slows, limiting further gains for the dollar.”
