AUSTRALIA DATA: Trade Surplus Continues Downtrend
The May merchandise trade surplus narrowed more than expected with April also revised lower. It came in at $5.77bn down from $6.03bn, as imports outpaced exports. The surplus has been trending lower for almost two years now with exports performing poorly since mid-2023. Strong consumer goods imports would probably worry the RBA but they have been easing, while strength has been in the intermediate goods component.
Australia merchandise trade surplus $mn
Source: MNI - Market News/ABS
- Exports rose 2.8% m/m after falling 2.2% in April to still be down 7.8% y/y after -7.2%. The pickup was driven by metal ores & minerals driving a 3.7% m/m increase in non-rural goods which are still 7.2% lower on a year ago, while rural fell 1.2% to be down 15.9% y/y.
- Imports rose 3.9% m/m to be up 3.5% y/y after -7.0% m/m and +2.1% y/y in April. May was driven by higher fuel imports and given the trade data are nominal the pickup in oil prices this year would have boosted this.
- Consumer goods imports rose 2.4% m/m but fell 2.3% y/y. The May increase was broad-based across sectors with transport equipment up 2.9% m/m and food & beverages +3.1%. Capital goods rose 0.5% m/m and 1.7% y/y due to the +22.9% m/m rise in ADP equipment but machinery fell 1% and transport 10.2%. Intermediate goods rose 6.6% m/m and 10.5% y/y as fuel increased 10.8% m/m.
Source: MNI - Market News/ABS
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BONDS: AU-NZ 10Y Yield Differential Close To Fair Value
A simple regression of the AU/NZ 10-year yield differential versus the AU-NZ 3-month swap rate 1-year forward (1y3m) differential suggests fair value is around -41bp versus the 10-year differential’s current level of around -42bp.
- The current regression error of -1bp compares with -23bp seen in early October.
- The widening in the regression error in early October last year came not long after the Pre-Election Economic and Fiscal Update.
- Therefore, the narrowing in the 10-year differential and the regression error at the end of last year likely reflected investors capitalising on more favourable entry points.
Source: MNI – Market News / Bloomberg
CNY: Reserve Managers Reportedly More Cautious About Adding Further Yuan Holdings
Reuters is reporting that global FX reserve managers are turning more cautious on adding further yuan allocations to their respective reserve pools, at least in the near term. They quote a recent Official Monetary and Financial Institutions (OMFIF) survey that points to such risks.
- Per Reuters: "A net 18% of reserve managers surveyed said they intended to boost exposure to the U.S. dollar in the next 12-24 months, more than any other currency. They cited the dollar's role in global trade and expectations of higher relative returns as reasons. But demand for China's currency among reserve managers has stalled."
- "Some 12% of 73 central bank reserve managers surveyed by OMFIF plan to reduce their yuan holdings in the next 12-24 months, while 13% plan to increase them. In 2023 just 3% said they intended to reduce yuan holdings, while none did in 2022 or 2021 when over 30% of respondents said they planned to up their exposure to the Chinese currency."
- In terms of the drivers of this move, it reflected relative returns (given current divergences in monetary policy between the US and China economies), along with geopolitical and market transparency issues.
- Still, managers reportedly expect to increase exposure to the yuan in the longer term.
- Gold allocations are expected to continue to rise per the survey (see this Reuters link for more details).
