UPDATE 1-Australia trade deficit widens; iron ore to the rescue

(Adds analyst reaction, detail)
* Trade deficit of A$2.64 bln, is largest since March 2008
* Pick-up in metal ore exports outweighed by imports of oil,
* Steep recovery in iron ore prices bodes better for export

By Wayne Cole
SYDNEY, Jan 8 (Reuters) - Australia's trade deficit in
November widened to its largest since early 2008 as imports
again outpaced exports, though a recent meteoric rise in the
price of iron ore suggests the worst of the trade pain is over
for the resource-rich nation.
The deficit on goods and services grew to A$2.64 billion
($2.8 billion) in November from A$2.4 billion the month before,
data from the Australian Bureau of Statistics showed on Tuesday.
That was the 11th straight month of deficit and was above
forecasts of A$2.3 billion.
Yet Chinese demand for iron ore has seen prices for
Australia's single biggest export earner rebound no less than 77
percent from lows hit in September to reach $153.90 a tonne this
week <.IO62-CNI=SI>.
The steel-making mineral is worth more than A$60 billion a
year to Australia, so the recovery is a much-needed boost to
profits, investment and tax receipts.
"The marked rise in iron ore values coupled with higher
export volumes should give a double boost in December, so this
looks like being the worst of the deficits," said Michael
Workman, a senior economist at Commonwealth Bank of Australia.
"The deficits could halve from here if prices stay remotely
near where they are now," he added.
The need to offset the drag from trade last year was a major
reason the Reserve Bank of Australia (RBA) cut interest rates in
October and December, matching the record lows of 3 percent set
during the global financial crisis.
Markets suspect rates might still ease further, but perhaps
not by much should iron ore prices hold their gains and the
Chinese economy continue to improve.
Australia's Labor government has also abandoned its goal of
achieving a budget surplus by June, so lessening the fiscal
pressure on the domestic economy.
As a result, interbank futures <0#YIB:> now imply rates
could bottom around 2.75 percent by April, up from a previous
target of 2.5 percent. Swap rates put a 38 percent
probability on a cut at the RBA's next policy meeting on Feb. 5.

Tuesday's data showed Australia's imports climbed 1.8
percent to a record A$27.3 billion, driven by purchases of cars
and oil. Imports of capital goods plateaued for the moment after
a very strong run, led mainly by heavy machinery for major
mining and liquefied natural gas projects.
Total exports of goods and services rose 1.2 percent in
November to A$24.7 billion, thanks largely to a 6 percent
increase in earnings from metal ores and minerals.
And those earnings should expand a lot more given the
appetite from Chinese steel makers remains strong. Total exports
to China increased by 13.5 percent in November, from October, to
a five-month high of A$6.6 billion.
There were promising signs for December as well since
shipments from Australia's busiest iron ore port, Port Hedland,
hit record highs that month. Exports to China alone were up 25
percent on November and 22 percent on December 2011.
Analysts at Australia and New Zealand Bank estimate iron ore
export volumes from Port Hedland rose 14 percent for the whole
fourth quarter, compared to the same period of 2011.
The revival in iron ore should at least help stabilise the
country's terms of trade, or the ratio of export to import
prices, which had fallen for much of last year. And it is
leading some miners to reinstate shelved investment plans.
Fortescue Metals Group last week said it would
resume an iron ore expansion that was put on hold in September,
aiming to raise capacity to 155 million tonnes a year.
"If the iron ore price were to persist around current levels
this would by itself lead to favourable revisions to a range of
economic forecasts," says Ivan Colhoun, head of Australian
economics at ANZ.

(Editing by Jacqueline Wong)