Thursday, April 2, 2009

Bullish on AUD following Feb. current account numbers

The Australian current account came in way above consensus numbers; $2.1B vs an expected $700MM. Keeping in line with our overall view, we were ready to dismiss it as a one time blip but after digging through the numbers a larger story emerged.


At the highest level, the surge in current account numbers on a monthly basis was driven by the non-rural goods exports component (which in turn is mostly driven by metals, minerals, ore, etc.). There was a drop in consumption goods, which is most likely explained by a anemic AUD and a more thrifty outlook by Australian consumers as the global depression mentality sets in. Capital goods imports  actually slightly increased but this was in the context of severely depressed numbers from the previous month. Much like many other recently released numbers that went through a bounce from Jan-Feb, there doesn't seem to be much reason to believe the rise in capital good imports is a sustainable increase.

Exports are primarily driven by commodities in Australia, with ~70-80% of exports falling under that umbrella. The rest of exports are driven by services (~15-20%) and rural goods (~5-10%). Services and rural goods are relatively stable by nature and combined with the small share that they command, can safely be ignored as volatility drivers for exports. On a specific commodity basis, we are seeing huge increases on energy related items (coal, natural gas, petroleum, etc.) and precious metals. This is helping to offset the collapses of other commodities including iron (especially following a disastrous 2008 in iron and iron ore).  On a forward looking basis, ZH would expect exports to marginally increase as certain segments are close to their expected bottoms and/or have the potential to increase even further (iron, coal, natural gas, gold). Not coincidentally, these are also the largest components. Services and rural goods can be expected to continue to be stable as they are mostly "staples/necessities" vs. "luxuries" (e.g. shipping & transportation services, meat, wool, etc.)


Similar to exports, imports are primarily driven by goods with services being a small, stable part of the equation (~15-20%). The drop in imports could best be attributed to a group described as "consumer luxury"; household electric, textiles, toys, non-industrial transport, misc. consumption goods. This is likely a result of the tremendously weak Aussie dollar after the crash last year, and an austerity somewhat imposed by the coverage of the global depression. As we mentioned, capital goods increased last quarter but we are not convinced this is a long term thing. The net picture is a strong view that imports are likely to continue to be weak in the near future.


With the current account poised to only increase and the RBA looking unmotivated to further cut rates, AUD is looking like a strong play going forward. The risks are relatively straightforward; if oil gets hit even more and/or if the gold rush ends, the account balance could vanish in 1-2 months. However, with every other major country looking to quietly devalue and facing far starker fundamental conditions, AUD is looking like a pretty strong play on a risk/reward basis. 
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Anonymous said...

Do you understand the benchmark system? Most bulk commodities (iron ore, coal, coking coal) are only repriced once per year on April 1 (Japan fiscal year). Minerals exports look out below! One caveat, the Chinese have reneged on their iron ore contracts (they don't buy coal or coking coal) so BHP/RIO/FMG are selling on the spot market at lower prices.

Anonymous said...

A heads up. This is Someone else s analysis.

a 4.4% rebound in exports, driven to a significant extent by a surge in the volatile non-monetary gold component (+54.9%). Excluding the impact of gold, the February rise in total exports would have been meaningfully more modest (+1.4%).

a 0.6% fall in imports, driven by a massive 13.4% fall in consumer good imports (consistent with yesterday’s weaker read on February retail sales).

Further ahead, we do not expect these large surpluses to last long, given two key underlying trends which will see the balance shift sharply back to deficit over 2009:

1. Firstly, export earnings are poised for a precipitous fall from April when bulk commodity prices are reset; and

2. Despite the weaker A$, import costs to date have been contained by a significant domestic inventory cycle (most evident today for consumer imports). As this matures, a meaningful rise in import costs will also further erode the trade balance.

Cornelius said...

@ 9:13 - you're right but most have been selling under benchmark for at least 6 months (I've heard ~30-40% in some cases). If BHP eventually gets its index system, we'll know true market value more efficiently than before but for now, you basically have to draw pricing conclusions from the discount/premium to benchmark. From that, I'm assuming most of the drop has been priced into current numbers.

@ 9:50 - interesting piece, what's the source? I'm not sold on the inventory cycle linkage to import costs. Additionally, the numbers I was looking at had imports being driven not just by non-monetary gold.