By Wayne Cole

SYDNEY, Aug 4 (Reuters) - Australia's trade surplus
ballooned to a record in June as export earnings from iron ore
and coal surged, lifting the local dollar and acting as a
reminder of why the next move in interest rates is still likely
to be up.

The surplus of A$3.54 billion ($3.2 billion) was almost
twice the market forecast and far outstripped the previous
record of A$2.5 billion. The surplus for the three months to
June amounted to A$6.6 billion, a turnaround of almost A$10
billion from the first quarter's deficit and a boon for
economic growth.

A government measure of city house prices also showed brisk
growth of over 18 percent for the year to June, a worry for the
Reserve Bank of Australia (RBA) which has been hoping higher
mortgage rates would cool the red-hot sector.

"The trade numbers are just massive," said Su-Lin Ong, a
senior economist at RBC Capital Markets. "That's a lot of
income flowing into the economy and we could well see nominal
GDP (gross domestic product) growth in double-digits."

"It's also coming while the labour market is already strong
and unemployment low," she added. "It means the bias is still
for higher interest rates down the track."

The central bank left rates unchanged at 4.5 percent at its
monthly policy meeting on Tuesday, and investors are wagering
it will stay on hold well into 2011.

The market is implying almost no chance of a hike to 4.75
percent in September and October and only 15 basis points of
tightening in the next 12 months.

But with the country's commodity exports benefiting so
greatly from demand in China and India, analysts suspect rates
will have to head higher at some point.

"The RBA is unlikely to be on the sidelines for long in an
economy with 9-10 percent nominal GDP and inflation in the
upper half of the target range," said UBS chief economist Scott
Haslem.

TRADE BONANZA

"If the past is any guide, the money from trade will
eventually leak into the broader economy via higher investment,
jobs growth, wages and dividends," said Haslem.

Exports climbed 7.1 percent alone in June, to rise 32
percent from the same month last year. In contrast, imports
rose just 0.2 percent in June.

Iron ore and copper exports jumped 23 percent in the month,
while coal rose 15 percent rise in coal and cotton more than
doubled. Contract prices for iron ore and coal have surged this
year thanks to demand from China and India, where more than 2
billion people are industrialising at breakneck pace.

As a result Australia's terms of trade, or the ratio of
export prices to import prices, could rise 20 percent this
year. The RBA's own index of Australian commodity prices
climbed 50 percent in the year to July to the second highest on
record.

Export volumes also looked to be higher for the second
quarter, implying trade could make a significant contribution
to GDP growth after several quarters of drag.

It should also see Australia's perennial current account
deficit shrink markedly in the quarter, making it less
vulnerable to swings in global financial sentiment.

All of this will shower money on the economy at a time when
the jobless rate is already down to 5.1 percent and nearing
lows that have sparked inflation in the past.

"It looks like the economy was firing on all cylinders last
quarter," said Adam Carr, a senior economist at ICAP. "The
boost to the terms of trade just shows why Australia is so
strong compared to the rest of the developed world."

"It also means the next move in rates is up, the only
question is when."

(Editing by Tomasz Janowski)