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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