© Taras Vyshnya, Adobe Stock

- AUD rises after trade surplus surges, lifts fundamental value.

- Exports rise as imports decline, boosting September surplus.

- AUD also benefits from Chinese economic data, stimulus pledges.

The Australian Dollar rose broadly Thursday after official data revealed a sharp increase in the nation's trade surplus during September, providing a tailwind to a currrency that is also being boosted by a series of positive developments in China.

Australia's trade surplus rose to $3.02 billion during September, up from $2.34 billion in the previous month and far ahead of market expecations for a balance of $1.71 billion.

The surplus surged after exports rose by 1% to $37.49 billion and imports declined by 1% to $34.47 billion, pushing the positive trade balance even higher to $3.02 billion.

"It’s been a stellar year for Australia’s export sector due to the combination of higher export volumes, buoyant commodity prices and a weaker AUD. Export receipts sit 15.9% higher on year ago levels," says Gareth Aird, an economist at Commonwealth Bank of Australia, in a note to clients. "This big lift in income is showing up in higher corporate profits in the resources sector which is flowing through to a bigger Government tax take."

Trade balance data measures the difference in value between a nation's imports and its exports. Currency markets care about it because the data provides insight into supply and demand of a currency in the "real economy", while also giving a steer on the likely pace of GDP growth in a given period.

A narrowing trade deficit suggests either that exports and their associated demand for a currency are rising, or that imports and their associated supply of a currency on global markets are falling. Both are typically good for a currency while a steadily narrowing trade surplus, or a widening deficit, is a negative influence.

The size and trajectory of a trade surplus or deficit is important for economic growth because imports are a subtraction in the calculation of GDP, while exports represent a credit to the value of economic output. As a result, rising exports and, or, falling imports can help boost the economy.

"Also published today was the international trade prices data. It confirmed that it was a favourable September quarter for our external sector from a prices perspective," says Aird. "The goods prices indexes give us a pretty good idea of how the terms-of-trade moved over the quarter. Our model points to a 1.0% lift."

The "terms of trade" describes prices of imported goods as a ratio of export prices. It is a key concept used by analysts when they attempt to "value" currencies because it uses real goods to reflect changes in the relative purchasing power of a currency.

In short, when the terms of trade rises, so too does the "fundamental value" of a currency. And Aird says Australia's terms of trade has risen by 1% during the recent quarter, a period when the Aussie's 2018 loss against its U.S. rival crossed over the 9%$ threshold.

"The August trade surplus was also revised sharply higher, providing a higher base for September’s figures. Service exports also performed well, due to a rise in travel, which was expected given the depreciation of the AUD. Looking through the volatility, imports growth continues to be consistent with a domestic economy that is performing well," says Jack Chambers, an economist at Australia and New Zealand Banking Group (ANZ).

The AUD/USD rate was quoted 1.06% higher at 0.7152 during early trading Thursday while the Pound-to-Aussie rate was up just 0.01% at 1.8048 thanks to a strong Sterling. The Aussie was higher against all G10 currencies other than the New Zealand Dollar Thursday.

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Chinese Manufacturers Resilient, Officials Pledge Support

China's Caixin manufacturing PMI rose from 50.0 to 50.1 during the recent month when markets had anticipated that it would decline to 49.9, which would have indicated that output within the sector is falling. However, the PMI remains above the 50.0 no-change threshold.

China's economy is creaking under the strain of tariffs imposed by President Donald Trump on around $250 billion of goods exported to the U.S. each year. Trump has previously threatened to impose tariffs on a further $267 billion of Chinese goods if the country does not change course on its "unfair" trading practices.

"Risk proxies found further support after comments from Kudlow that Trump has not “set in stone” any decisions on escalating tariffs on Chinese goods and may withdraw some duties if there are promising policy discussions with China. Given he’s a perma China/trade dove who has time and again proven to be a reverse indicator on Trump’s actions, we’re not holding our breath," says Sue Trinh, head of Asia FX strategy at RBC Capital Markets.

Thursday's price action, and hopes of a detente in the so called trade war, come after the Australian Dollar was boosted Wednesday when Chinese officials said they will soon unveill another stimulus package designed to support the economy as it grapples with President Trump's tariff measures.

China's National Council said Wednesday the economy is being damaged by "external sources" and is in need of stimulus to temper an ongoing slowdown. Official data showed Chinese growth falling from an annualised pace of 6.6% to 6.5% during the third-quarter. But some economists have said the true slowdown was even steeper.

"The amount of the stimulus is missing in the announcements. We estimate it at CNY9 to 10 trillion. We also weaken our yuan forecasts for 2019," says Iris Pang, a China economist at ING Group, before forecasting the Chinese Renmimbni will shed a further 6% of its value over the coming year, taking the USD/CNY rate to 7.30 in 2019.

This is important for the Aussie because the Antipodean currency is underwritten by Australia's mammoth commodity trade with the world's second largest economy. That means whenever the Chinese economy or currency gets hurt, so too does the Australian Dollar, and vice versa.

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Bank-beating exchange rates! Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here