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Australia's trade surplus has fallen to a 17-month low amidst a decline in falling commodity export earnings linked to the slowdown in China.

The trade surplus provides a fundamental underpinning to Australian Dollar valuations and its decline helps explain the currency's ongoing underperformance against many of its G10 peers.

Australia’s trade surplus declined to A$8.0BN in July, the lowest level since February 2022 and down A$2.2BN on the June surplus of A$10.3BN. Since 2021 the surplus has dipped below $8BN on only three occasions.

The declining surplus came as export earnings fell A$1.1BN, or 2.0% and imports rose 2.5% to A$1.1BN.

"The key dynamic driving the moderation of the trade surplus is the receding of commodity prices from the record highs of mid-2022, down another 2.9% in July. That has commodity prices back around the levels at the end of 2021 but still around one third higher than during 2019, ahead of the pandemic," says Andrew Hanlan, an economist at Westpac.

Commodity prices have slid amidst an ongoing economic slowdown in China which is to a great degree linked to a stagnating property sector.

The health of the Chinese economy is particularly important for Australia's economy and its currency given China is Australia's most important export market.

The Australian Dollar has trended lower against the U.S. Dollar, Euro and British Pound for much of 2023 as investors watched Chinese economic data undershoot expectations.

Above: Australia's trade surplus has peaked, image courtesy of Westpac.

Analysts say for the Australian Dollar to experience a sustained rebound the Chinese economy must pick up a fresh head of steam.

Chinese authorities continue to bring in measures to try and stimulate growth, but thus far have been unable to find the 'silver bullet' required to invigorate growth rates to the impressive levels seen in recent years.

China meanwhile reported Thursday that its own trade surplus was modestly smaller than expected at $US68BN in August.

Above: AUD is down 10% against the GBP and 6.5% against the USD in 2023.

Both exports and imports continued to decrease in a sign of slowing domestic activity and demand.

"The 7.3%/yr decrease in Chinese imports reflects a combination of lower commodity prices and weakness in Chinese domestic demand," says Joseph Capurso, an analyst at Commonwealth Bank.

"Another set of poor Chinese economic data is not helping AUD," he adds.

Capurso explains that the absence of a large package to stimulate the Chinese economy will remain a weight on the Australian Dollar for the near term.

"The longer AUD/USD stays below 0.6403 (23.6% fibbo), the greater the chance AUD/USD heads down another few more cents," he says.