Australian Trade Deficit Shrinks

The Australian Bureau of Statistics reports that in February, the trade deficit in Australia was $178 million. This number, compared to a $1.2 billion deficit in January and projected $1 billion deficit analyst forecasted, is odd to say the least.

Trade deficits are driven by two things: world demand for goods and the strength of the nation's currency. Each plays a large part in the overall market for foreign goods.

For example, Australia had predicted a larger deficit due to February being a short month, as well as the Chinese New Year lowering demand for key exports, such as coal and iron. Despite these predictions, exports were strong throughout the month.

The nation's currency also plays a large role in whether it has a trade deficit or not - and in a kind of strange way. A weaker currency leads to stronger exports - due to those good being comparatively cheaper in the country they're exported to. The AUD is currently quite strong though, and so the world demand must out-weigh this.

Each of these effects is, of course, determined by markets. World demand is a downward sloping demand function, and Australia is a large part of world supply for its output.

The FOREX, the foreign exchange market, is a supply and demand model for currency that changes the equilibrium prices of currencies. These two elements combine to determine if a country will be running a trade deficit or surplus.

While Australia hasn't run a trade surplus in over 12 months, it still kicks the crap out of the United States - which hasn't had a trade surplus since 1975.