APR 4 AUD Trade Balance (FEB) (00:30 GMT; 19:30 EDT)
Expected: -A$2.500B
Previous: -A$2.723B

What Are The Markets Facing?

While most central banks are in the process of cutting rates – such as the Federal Reserve and the Bank of Canada – or are considering reducing rates, the Reserve Bank of Australia has been on the other side of the coin as they’ve raised rates at two of the past three monetary policy meetings. However, the RBA’s rate hike cycle may be coming to an end, and the release of the Australian Trade Balance may underpin the reason why. The trade deficit is anticipated to narrow to A$2.50 billion from A$2.723 billion on an increase in mining exports. Indeed, booming Asian demand for commodities has fueled Australia’s expansion, as companies like Rio Tinto and BHP Billiton hire workers, which has led to tight labor market conditions and higher wages. As a result, domestic demand has surged and inflation has accelerated rapidly. However, if the trade deficit narrows on a sharp drop in imports, this would suggest that domestic demand growth is waning. In fact, RBA Governor Glenn Stevens noted in his monetary policy statement on March 4 that there is “tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat.” However, Stevens also said that “a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time.” As a result, signs of major slowing in domestic demand will reduce the chances that the RBA will raise rates again this year, but it will take a significant drop in price pressures before the central bank will even consider cutting rates.

Bonds – 10-Year Australian Government Bond Futures

Australian government bonds ran headlong into resistance at the 94.20 level, which has capped similar rallies over the course of 2007. Indeed, the contract remains heavy as traders judge that the RBA remains hawkish. Upcoming data could lead AGBs up towards the 93.90 level as import growth is expected to slow, suggesting that domestic demand is waning. On the other hand, if Australian equity markets continue to gain, AGBs could ease lower toward 93.70.

FX – AUD/USD

The AUD/USD pair has run headlong into resistance at the 50 percent fib of 0.9470 – 0.8952 at 0.9215, buoyed by strong commodity prices. While broad risk trends will likely remain the primary driver of the Aussie given its high yield, upcoming economic data could shake AUD/USD up. The Australian trade deficit is anticipated to narrow, but if it is the result of a sharp drop in imports, the news will suggest that domestic demand may be cooling and spark speculation that the RBA will not see the need to raise rates any further. As a result, the pair could pull back toward near-term support at 0.9070, though more substantial support rests at the 100 SMA at 0.8961. On the other hand, indications that expansion in Australia will keep pace could lead AUD/USD to break above resistance toward 0.9350.

Equities – S&P/ASX 200

While the S&P/ASX 200 has recovered somewhat since tumbling from the November 2007 highs to a low of 5,039.60, fears that a possible US recession and a credit crunch will impair the global financial markets could remain a stress on the index. Now that the Federal Reserve has enacted a total of 300bps in rate cuts since last September, equity markets in the Asia-Pacific region have stabilized as a sigh of relief. However, Fibonacci resistance at the 5,650 level capped Friday’s rally, but with the Australian trade deficit anticipated to narrow, the index could push higher for a test of 5,800. On the other hand, a return to risk aversion or a disappointing figure could weigh the index down toward 5,400.

Terri Belkas is a Currency Strategist at FXCM.