Australia’s trade balance swung to a deficit of A$3,018M month-on-month in May, reversing a surplus of A$1,383M previously (revised from A$1,791M) and undershooting the market consensus of a A$2,200M surplus, according to the Australian Bureau of Statistics. Exports fell 6.9% MoM after a 7.2% rise, while imports increased 2.6% MoM compared with a 0.2% gain in April (revised from 0.8%). Following the release, the Australian Dollar edged lower, with AUD/USD at 0.6890, down 0.02% on the day.
In price action, AUD/USD remained under the 20-day Bollinger middle band and the 100-day moving average, while the upper Bollinger band sat near 0.7115. The Relative Strength Index (14) was around 32, just above oversold territory. Support was seen near the lower Bollinger band at about 0.6845. Resistance levels were marked at roughly 0.6980, then 0.7074, and again near 0.7115.
Trade Deficit and Export Weakness Weigh on the Australian Dollar
Australia’s sudden swing to a A$3 billion trade deficit in May is a significant bearish signal for the Australian dollar. This was driven by a sharp 6.9% fall in exports just as imports rose, pointing to both weakening foreign demand and resilient domestic spending. For us, this surprise result solidifies the negative outlook for the AUD/USD in the coming weeks.
This weakness in exports is not happening in a vacuum. We’ve seen iron ore prices, a critical Australian export, fall over 8% in the last month to below $105 per tonne. This has been compounded by recent data showing China’s Caixin Manufacturing PMI dipping to 50.9, indicating slowing growth in our largest trading partner.
The data provides a strong reason for the Reserve Bank of Australia to maintain a dovish stance. With the cash rate holding at 4.35% and inflation now easing, the chance of another rate hike in 2026 is fading fast. This removes a key pillar of support for the currency and tilts the policy outlook against the Aussie.
Technical Strategy and Historical Precedent
Given this environment, we see value in purchasing AUD/USD put options to position for a further decline. This strategy allows for participation in a move toward the technical support level around 0.6845 while clearly defining our maximum risk. Implied volatility remains at moderate levels, making this an efficient way to express a directional view.
For those with a less aggressive stance, selling out-of-the-money call options or implementing bear call spreads is also attractive. This allows us to profit from the AUD/USD remaining below the strong resistance noted near 0.6980. The technical chart shows significant supply in that area, creating a high-probability zone for this type of trade.
Looking back, this setup is reminiscent of the 2018 period when concerns over global trade and falling commodity prices weighed on the currency. During that time, a similar break in the trade balance preceded a multi-month decline in the AUD/USD. History suggests that this type of fundamental shift should not be ignored.
