The Australian Dollar Rises on Record Trade Surplus as RBA Narrative Falls by Wayside 

© Taras Vyshnya, Adobe Stock

- AUD supported by record trade surplus, higher buidling approvals. 

- RBA calls for fiscal support to outlook, says will cut again if needed.

- But lower interest rate narrative is falling by the wayside for the AUD.

- CBA says little downside left for AUD, looks for a shallow recovery. 

The Aussie topped the G10 league table again Wednesday as a record trade surplus and higher building approvals for the month of May offered support to the Antipodean unit amid signs the threat of lower Reserve Bank of Australia (RBA) interest rates is falling by the wayside among currency traders. 

Australia's trade in goods and services surplus surged from A$4.82 bn to A$5.74 bn in May after exports rose faster than imports during period in what is a positive development for the Australian currency as trade balance figures reflect real world supply and demand of a currency. 

Markets had anticipated a surplus of just A$5.25 bn for the month of May so the higher number was as a positive surprise for investors. Meanwhile, other Australian Bureau of Statistics data released in the early hours of Wednesday morning showed the number of building approvals surprising on the upside.

Approvals for new home construction projects rose by 0.7% in May when markets were looking for no change amid an ongoing deterioration of the housing market and outlook for the construction industry. Housebuilding approvals fell 0.3% but permissions for non-house dwellings rose by 1.2%. 

House prices have fallen on average in all of Australia's eight capital cities over the last 12 months or more, stoking fears for household confidence and spending as well as the construction industry and jobs market. As a result, Tuesday's data is a clear positive for the narrative around the Aussie economy.

"The signs of green shoots are encouraging, with unit approvals creeping up for the last few months," says Felicity Emmett at Australia & New Zealand Banking Group (ANZ). "The historically low cash rate, along with potential easing in finance regulation by [Australian Prudential Regulation Authority], could help support approvals in the coming months."

Above: Australian Dollar performance Vs G10 rivals Wednesday.

Wednesday's economic data came after Reserve Bank of Australia Governor Philip Lowe told an audience in Darwin the bank will cut its interest rate again if further monetary policy stimulus is "needed" to engineer and economic pickup that gets inflation back within the 2%-to-2% target band. 

Lowe's comments follow the RBA's Tuesday decision to cut the Australian cash rate to a fresh record low of 1%, as was widely expected by the market.

However, and in a sign of how well accustomed markets now are to the idea that Aussie interest rates are only going in one direction, the Antipodean currency actually rose afterward. 

Australia's Dollar has now been the best performing G10 currency for two consecutive sessions despite an interest rate cut that could typically be expected to drive the Aussie lower. 

But with markets ahead of the curve as far as RBA rate cuts go the narrative of lower borrowing costs for companies and consumers, which mean lower returns for investors in Australia, is falling by the wayside among currency traders. 

"We expect the RBA to keep the cash rate steady until November while it assesses the impact on the economy of the cuts to the cash rate and income tax rates. Lowe continued to call for more budget support and structural policies to complement the RBA’s looser monetary stance," says Kim Mundy at Commonwealth Bank of Australia. 

Above: AUD/USD rate shown at daily intervals.

Pricing in the overnight-index-swap market implied on Wednesday, a December 03 cash rate of just 0.75%, which suggests investors are 'all-in' with bets the RBA will cut Aussie interest rates on one more occasion before the year is out. Technically that means the Aussie will already have paid the price for a rate cut that's not yet delivered. 

Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have over capital flows, and their allure for short-term speculators.

Capital flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency. Rising rates have the opposite effect.

"With commodity prices very high – iron ore prices are above $US120 per ton – and the FOMC about to embark on a rate cut cycle, we see little material downside to AUD in the near term," says CBA's Mundy.

CBA forecasts the AUD/USD rate will rise to 0.72 by year-end. The Pound-to-Aussie rate is expected to fall from 1.8069 to 1.7777 over the same period. 

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

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