A big miss on the trade surplus caused the Australian dollar to slump to its lowest level since June, underscoring the economy's vulnerability to lower iron ore prices.
The trade surplus for October came in at $105 million, narrowing month-on-month from a revised $1.6 billion surplus recorded in September, figures released on Thursday showed. Economists were looking for a surplus of about $1.4 billion.
The key weakness in the October trade report was the health of export earnings, which fell by $903 million, or 2.8 per cent, most of which is attributed to the slump in iron ore prices and lower volumes of coal exports upon the tightening of environmental controls in China. It was the largest drop in exports since April.
Iron ore has since recovered, but as Westpac economists noted, the benefit of expanded capacity in the liquefied natural gas sector was undetectable in the latest trade report. Dalian iron ore futures fell 2.6 per cent overnight after spot prices rallied this week above $US70 a tonne, for a gain of 20 per cent since late October.
That puts the Australian currency at US75.46??, a drop of almost 0.3 per cent for the session, and with the US75?? level firmly in reach. The currency is 6.3 per cent below this year's high of US81.25??.
Joanne Masters, economist at ANZ, expects that as more LNG comes on stream, that will provide a solid buffer against deficits.
"I would have thought it's pretty hard to imagine we're going to see a sustained run of trade deficits on just that alone," she said.
Ms Masters emphasised the rise in imports, and given evidence that shelf prices for goods are falling, inferred that healthy volumes were behind the numbers.
"It tells you that retailers are perhaps expecting a reasonable Christmas spending season."
Third-quarter growth slows
This week, data showed retail sales rebounded 0.5 per cent in October but third-quarter economic growth came in at a slightly softer than expected 0.6 per cent as consumption disappointed and business investment firmed.
The ANZ economist highlighted the influx of international retailers that began with apparel, then furnishings, and now outdoor sports and camping equipment. "That's making retail very competitive."
Imports increased by $596 million, or 1.9 per cent, helped also by the higher cost of fuel as the oil price rebounded.
According to CommSec, the rolling surplus stands at a record $20.1 billion on $102.3 billion of exports to China over the preceding 12 months.
Services posted a slight deficit of about $100 million. The services deficit will widen, Capital Economics predicts, pointing to the distortive effects of the Australian dollar's strength in late 2017, and could reduce the total trade balance by $700 million.
The month-on-month fall in service exports of 1.6 per cent was the largest decline since April 2016.
John Peters, economist at Commonwealth Bank, was optimistic about the outlook for exports and household spending. LNG exports will peak in the second half of next year, he predicts, and there are "solid" trade surpluses ahead.
"Ongoing sustained trade surpluses and likely large surpluses ahead over late 2017 and into 2018 bode well for improvements in the Commonwealth's fiscal position," he wrote in a report to clients. That is positive with the federal government's mid-year economic and fiscal outlook (MYEFO) around the corner.
On Thursday, the Australian dollar was the second-worst performing Group of 10 currency against the US dollar, beaten only by the New Zealand dollar which posted a loss of 0.46 per cent.