Australian Dollar in a Retail Bonanza

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The Australian Dollar's run of gains extended after rising retail sales suggested the Reserve Bank of Australia (RBA) has less room to cut interest rates in 2024.

Australian retail sales rose 0.7% month-on-month in August as tax cuts and energy rebates allowed consumers to splash the cash.

"While warm weather may have played a part, today’s result also looks to be a clearer sign that tax cuts and other fiscal support measures are starting to provide some lift to spending," says Neha Sharma, an economist at Westpac.

Australian retail sales were 3.1% higher on a year-on-year basis in August said the ABS, with July's figure also being raised.

"The lift was broad-based, with all states and territories and all categories, apart from household goods, seeing a lift in retail spending," says Madeline Dunk, an economist at ANZ.

The headline here is that the Reserve Bank of Australia (RBA) will remain cautious and will be hesitant to cut interest rates. If Australian interest rates fall at a slower rate than those elsewhere, the Australian Dollar will remain supported.

"The retail sales data reinforces that the RBA is likely to remain on hold until 2025 before beginning to follow other G10 central banks and start cutting rates," says David Forrester, an analyst at Crédit Agricole.

The Australian to U.S. Dollar exchange rate (AUD/USD) rose to a high of 0.6934 in the wake of the retail sales data, and the Pound to Australian Dollar exchange rate (GBP/AUD) is on course to record a fourth consecutive daily decline at 1.9315.

"AUD received modest support following the positive surprise from Australian retail sales," says Joseph Capurso, a currency strategist at Commonwealth Bank of Australia.

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Capurso's colleague Gareth Aird, who is head of Australian Economics at the bank, says the key question both analysts and the RBA are grappling with is whether the bulk of the Stage 3 tax cuts will be spent or saved.

"Today's retail trade figures lend weight to the idea that the consumer pulse of spend may be firming by more than we currently anticipate," says Aird.

"We think the ongoing boost to real household disposable incomes from the tax cuts and cost-of-living measures will support a modest pick-up in spending ahead," says ANZ's Dunk.

Recently, markets anticipated the RBA would cut interest rates once by the time the year is out. However, these expectations have faded and they are offering the Aussie Dollar support.

The RBA will also be aware of the positive pulse coming from China where a notable package of monetary stimulus measures have been announced, which can bolster Aussie exporters and shore up the economic outlook.

"More importantly, AUD has been supported by optimism about a ‘soft landing’ in the US economy soft landing and the Chinese government’s efforts to support domestic demand," says Capurso.

However, he thinks "further large gains" by AUD would only be possible with a large budget (fiscal) stimulus from China.

Existing measures announced by China have largely focussed on monetary policy, with the People's Bank of China cutting interest rates and authorities lowering threshold levels on various mortgages.

Last week we reported strategists at MUFG Bank were initiating a "long AUD/USD trade idea" based on "building investor optimism towards the growth outlook in China and globally" after recent policy changes in the U.S. and China.

The Federal Reserve's recent 50 basis point interest rate cut "has created more room for domestic policymakers to step up support for China’s economy" without significantly impacting the Chinese Yuan.

MUFG says China's "comprehensive package of support measures and strong commitment to do more if needed" can support confidence and is "a positive development for investor sentiment, and signals a stronger commitment to boost growth in China."