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Tuesday's current account augurs fears over Wednesday's GDP number while the RBA remained commited on the road to nowhere in March. Technicals could push the Aussie higher yet.
The Australian Dollar saw mixed trading as markets digested the latest Reserve Bank of Australia interest rate statement, a volley of macroeconomic data and an evolving technical backdrop.
Australia’s unit has been spared the drubbing that seemed all but inevitable when January’s dire retail trade figures emerged alongside a sharp widening in the fourth quarter current account deficit.
This price action is something that might have more to do with the Dollar’s evolving technical backdrop than any macroeconomic data or the more optimistic chord struck by the Reserve Bank of Australia overnight.
January retail sales rose by just 0.1% from their December level when economists and markets had been looking for growth of 0.4% that would have substantially reversed the slump seen in the prior month.
On an annual basis, sales were up 2.3% in trend terms when January’s number was compared with the same period one year ago. Department stores were the weakest category for January, posting yet another contraction, while food, household goods and cafes saw growth.
“The jury is still well and truly out on whether we are on the cusp of a significant pick up in retail trade growth. We think such a sustained solid pickup in retail activity is still some way off,” says John Peters, senior economist at Commonwealth Bank of Australia.
"Any positive impact on the retail sector from strong employment growth and a buoyant tourism and education sectors looks likely to continue being eclipsed by historically soft wages growth and wary consumers."
Separately on Tuesday, Australia’s current account deficit was shown widening sharply to -£14 billion in the fourth quarter, a significant deterioration from the £-11 billion deficit seen in the third quarter.
The deterioration was caused by imports having risen concurrently with a fall in Australia’s exports, creating a mismatch between what Australia spent overseas and what it received in foreign income.
Current accounts measure, in the most basic sense, the balance between the amount of funds coming into a country and the amount leaving. It is best thought of as a nation’s bank balance with the rest of the world.
“The volume of exports and imports is what matters for tomorrow’s Q4 GDP numbers. Exports were 1.7% lower in the quarter while imports were 1.6% higher. This means that net exports will subtract around 0.5ppts from Q4 growth,” says Kristina Clifton, a senior economist at Commonwealth Bank of Australia.
The fourth quarter decline in “net trade” is something that is likely to weigh on Australia’s fourth quarter GDP number, which is due for release Wednesday at 21:35 London time.
All told, the latest macroeconomic data continued to paint a picture of a challenging consumer environment and moribund economy overall, seemingly leaving little grounds for cheer among Australian Dollar bulls.
Yet the Australian Dollar saw a chequered performance against the G10 currency basket in early trading Tuesday, which belied the downbeat message coming from the morning’s data.
"There are a couple of warning signals: the Elliott wave count is saying this is the end of the move lower AND the TD perfected set up on the daily chart offers another warning signal so we have exited our short position for now. We have no strong bias and will sit on the sidelines today," says karen Jones, a technical analyst with Commerzbank, who has identified signs of strength returning to the Aussie Dollar on the charts.
Above: AUD/USD rate shown at hourly intervals.
The AUD/USD rate was quoted flat at 0.7764 at the London open after having risen by a handful of points in the overnight session while the Pound-to-Aussie rate was down 0.20% at 1.7797 after the British currency ceded ground to its Antipodean rival.
Above: Pound-to-Australian-Dollar rate shown at hourly intervals.
Australia’s currency also made gains over the Euro, Swiss Franc, Canadian Dollar and the Nordic currencies like Swedish Krona, Norwegian Krone and Danish Krone.
A More Optimistic Chord
The Reserve Bank of Australia struck and optimistic tone in its latest monetary policy statement, also released overnight, flagging an improvement in the domestic as well as global economies.
Notably, the RBA projected faster Australian economic growth in 2018 and observed that the all-important rate of wage growth “appears to have troughed”, both being taken as clear positives by the market.
However, some say the RBA’s statement on Australian economic growth actually represents a downgrade of its earlier forecasts if anything, given the RBA previously predicted 2018 GDP growth of 3.25% and the consensus for 2017 GDP growth is 2.5%.
“The Reserve Bank appears to be less confident about the growth outlook. Nevertheless, we still believe that it expects to be raising interest rates beginning sometime in late 2018 and into 2019. That would be in line with current market pricing.,” says Bill Evans, chief economist at Westpac.
“In contrast, Westpac is not surprised to see the Bank more cautious on the growth outlook and we continue to expect that the cash rate will remain on hold in 2018 and 2019.”
It goes almost without saying that the RBA still left its cash rate unchanged at a record low of 1.5% in March, for the 20th month in a row.
There aren’t any economists who have taken optimism about a wage growth “trough” as a sign of a pending change in the monetary policy stance of the central bank either.
“We remain comfortable with our long-held view that the RBA will take its time in starting a rate-hike cycle. Financial markets appear to be coming round to this view too,” says Besa Deda, chief economist at St George Bank.
“The overnight-indexed swap market is attaching a probability of 63% that the RBA will hike by the end of this year. This is a marked shift down when compared with three months ago.”
The Road to Nowhere
Current pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates while also providing insight into investor expectations for monetary policy, suggests the RBA will not raise the Australian cash rate until well into 2019.
In fact, a full interest rate hike is not fully priced in at all for any point within the next 12 months. There is just more than a 50% implied probability of a rate hike in November 2018 and an 80% implied probability of a rate hike in February 2019 but not at any point is a change of interest rates fully priced.
This contrasts with US interest rate markets where there is a 150% implied probability of another rate hike this month, in March.
It is a change in these probabilities that would elicit a reaction from currency markets although, in order for investors to feel more confident about betting on a change in Australian monetary policy, inflation and wage pressures will need to pick up first.
Like in many other countries, Australian inflation has been held back by subpar wage growth, which is weighing on consumer spending amid high levels of household debt.
The latest example of weak pay growth came in the December quarter wage cost index, released in February, which showed private sector pay growth remaining close to a record low and lagging that of the public sector.
Wage pressures, and labour markets by implication, are the most important macroeconomic variables in the global interest rate equation at the moment given their significance for inflation.
This means they are also the most significant variables for currency markets because central banks can only raise interest rates in response to changes in inflation pressures. It is expectations of higher or lower interest rates that dictate the respective fates of the currencies tied to them.
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