Australian Dollar, Bonds Down on Widening Trade Deficit

Australia’s trade deficit continued to mount during the month of December as the worst drought in a century has slashed shipments from the world's third-largest wheat exporter to a 15-month low. The balance plunged to –A$1.336 billion as a 9 percent drop in grain exports led the decline, and the situation could continue to worsen as the Australian government has forecast that the drought will cut the country’s wheat harvest by 60 percent from last year, which could take away as much as 0.75 percentage points from economic growth during the first and second quarters of 2007. Additionally, a strong Australian dollar has made products from the country particularly expensive for foreign countries, further hurting exports. The strength of the Australian dollar has also given a boost to capital and intermediate goods imports. In contrast, imports of consumer goods declined 1 percent as three interest rate hikes in 2006 by the Reserve Bank of Australia has taken its toll on household spending. As a result, the RBA is less likely to feel compelled to raise interest rates, especially after Q4 CPI was much lower than expected. Forex markets were essentially the only responders to the disappointing Australian release, while fixed income and equity markets moved in favor of outside factors.