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Australia's Trade Deficit Steady as Exports Improve

Australia's trade deficit was little changed at A$838 million (US$687 million) in February, defying expectations of a widening, as export growth matched imports in what might be a sign of a long-awaited export upturn.

The deficit compared to A$832 million in January and was well below market forecasts of A$1.2 billion. Exports rose 2.1% in the month to a seasonally adjusted A$18.55 billion, with most of the growth in metal ores and gold.

"The mining story is finally starting to deliver increased production and exports," said Michael Blythe, chief economist at Commonwealth Bank. "We should see some better looking numbers on the export front over the next few months, and we will see some further progress in winding back of the deficit," he added.

The data helped the Australian dollar edge up to 81.65 U.S. cents but had little impact on bonds as it did nothing to resolve the outlook for interest rates, which is the main obsession of investors right now.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and the futures market is pricing in around a 66% chance the central bank will raise its 6.25% cash rate for the fourth time in the past year.

The RBA will announce its decision at 9:30 a.m. local time on Wednesday and if rates are lifted to 6.5% they would be at their highest since December 1996.

Some analysts noted that a solid 2.1% rise in imports in February, driven by a 5% increase in consumer goods, underlined how strong domestic demand was.

"It is consistent with strong growth in the first quarter and still consistent with all the information suggesting the RBA will increase its rates tomorrow," said Stephen Roberts, research director at Grange Securities, a unit of Lehman Brothers.

Waiting For Exports

Policy makers have long hoped that external demand would take over from domestic consumption in driving the economy and so help relieve some upward pressure on inflation.

Healthy global economic growth and and ravenous resource demand from China and India has indeed boosted the price of many of Australia's commodity exports. The country's terms of trade -- what it gets for exports compared to what it pays for imports -- has surged over 30% in the past three years.

Yet the volume of exports has lagged far behind, such that trade took a hefty 1.3 percentage points out of economic growth in the fourth quarter of last year.

Analysts are still hopeful that the massive investment in mining and energy projects and infrastructure of recent years will eventually boost exports.

The RBA itself has predicted a solid pick up in resource exports this year as a number of major projects come on stream and supply bottlenecks ease.

Indeed, with resource exports up in both January and February, trade looked to have been much less of a drag on growth in the first quarter. "Barring a huge increase in the March deficit, the external accounts are on track to make a positive contribution to growth," said David de Garis, senior markets economist at nabCapital. "That would be the second positive contribution in the past three quarters."

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