Every month, the Australian Bureau of Statistics releases trade balance data — the difference between what Australia exports and what it imports. Most people glance at the headline number and move on. But for anyone trying to understand where the Australian dollar is heading, these figures deserve a closer look.

Trade Balance Basics

A trade surplus means Australia is exporting more than it imports. A deficit means the opposite. For much of Australia’s modern economic history, the country ran trade deficits, meaning more money was flowing out to pay for imports than was coming in from exports. That changed dramatically around 2019-2020, when surging commodity prices — particularly iron ore — pushed Australia into sustained surpluses.

The trade balance matters for the currency because it reflects real demand for Australian dollars. When a Chinese steel mill buys Australian iron ore, it ultimately needs to buy AUD to pay for it. When an Australian consumer buys a German car, they need to sell AUD and buy euros. The net of all these transactions feeds directly into currency flows.

Iron Ore: The Elephant in the Room

It is almost impossible to discuss Australia’s trade balance without talking about iron ore. The commodity regularly accounts for more than a third of Australia’s total merchandise exports. When iron ore prices are high, the trade surplus widens, AUD demand increases, and the dollar tends to strengthen.

The relationship is not always clean. There are lags — export volumes are contracted months in advance, and payment flows do not always align with spot prices. But over any meaningful period, the correlation between iron ore prices and the AUD is one of the strongest in currency markets.

Coal and liquefied natural gas are the other major contributors. Together with iron ore, these three commodities can account for more than half of total exports in a strong month. This concentration is both a strength and a vulnerability. When China’s economy is booming and building infrastructure, Australia’s trade surplus swells. When Chinese demand softens, the surplus narrows quickly.

Services Trade Gets Overlooked

While commodities dominate the goods trade, services trade tells an important supplementary story. Education and tourism have historically been Australia’s largest service exports. International students paying tuition fees and living expenses represent a significant source of AUD demand.

The pandemic decimated both sectors, and the recovery has been uneven. Student numbers have rebounded strongly, but tourism has been slower to return to pre-pandemic levels. Watching the services trade balance can give early signals about whether these recovery trends are continuing or stalling.

What to Watch in the Monthly Data

When the ABS releases trade data, here is what experienced currency watchers focus on:

The headline surplus or deficit. A widening surplus is generally positive for the AUD, and vice versa. But the market has usually priced in expectations, so it is the surprise that matters. A surplus of $8 billion when the market expected $10 billion can actually weaken the dollar.

Export volumes versus prices. A surplus driven by higher commodity prices tells a different story than one driven by higher export volumes. Price-driven surpluses can reverse quickly if commodity markets turn. Volume-driven surpluses tend to be more durable.

Import trends. Rising imports can signal strong domestic demand, which might support rate expectations and the AUD. But a sharp rise in capital goods imports could signal business investment that will boost productivity later — a more nuanced positive.

Trading partner composition. A growing share of exports going to a single market, particularly China, increases concentration risk. Diversification across partners tends to be viewed more favourably by longer-term currency investors.

The Bigger Picture

Australia’s shift from persistent deficits to regular surpluses over the past five years has been one of the most significant structural changes in the country’s external position. It means Australia is less reliant on foreign capital inflows to fund its spending — a dynamic that historically made the AUD vulnerable during periods of global risk aversion.

This does not mean the AUD is immune to sell-offs. The currency still moves with global risk sentiment, interest rate differentials, and countless other factors. But a country running trade surpluses is fundamentally in a stronger position than one running deficits. The AUD’s floor in downturns is arguably higher than it used to be.

Reading the Data Yourself

The ABS publishes trade data on its website each month, usually around four to five weeks after the reference period. The data is free and reasonably straightforward to interpret. For anyone serious about understanding AUD movements, adding the trade balance release to your calendar is a worthwhile habit.

The trade balance alone will not tell you where the dollar is going next week. But over quarters and years, it remains one of the most reliable indicators of the fundamental demand for Australian dollars. In a market full of noise, that kind of signal is worth paying attention to.

James Hargreaves is a Sydney-based financial journalist covering currency markets and macroeconomic trends.