Australian Dollar is Lower as Retail Sales Data Delivers Worst Month Since 2013

"Today’s data reinforces the RBA’s concern that slow wage growth and rising household debt levels would restrain household spending" - Janu Chan, St George Bank. 

The Australian Dollar was seen underperforming key rivals Thursday as traders reacted to the worst set of retail sales figures since March 2013, which have set alarm bells ringing over the outlook for the Australian economy and vindicated the Reserve Bank of Australia for its caution on rates.

Retail sales fell by -0.6% for the month of August, according to Australian Bureau of Statistics (ABS) figures, when economists had forecast them to rise by 0.3%.

“This was the weakest monthly result since March 2013. Notably, whereas most monthly falls in retail sales tend to come off a strong gain in the month prior, the August fall followed a 0.2% dip in July,” says Matthew Hassan, a senior economist at Westpac.

The Australian Dollar slid broadly against the G10 basket Wednesday, with losses heaviest against the Euro and Japanese Yen. Tellingly, the Aussie currency posted a decline against the Pound Sterling, which was also down broadly during early trading. 

The Pound-to-Australian-Dollar rate was quoted 0.06% higher at 1.6840 in London. The Australian-Dollar-to-US-Dollar rate was quoted 0.39% lower at 0.7830.

Rubbing salt into the wounds of traders and interest rate hawks, the ABS revised its July estimate of retail trade downwards at the same time. Previously markets had thought retail sales were flat during July but, according to the latest, they actually fell by 0.2%.

“The 0.8% contraction over July-August is the largest 2mth decline since October 2010, near the tailend of the RBA's 2009-10 tightening cycle,” says Hassan.

All categories of Australian retailer saw a dip in sales during August except for department stores, which eked out a small gain, although this category suffered from among the sharpest falls during July so was coming off of a low base in August.

“Broad-based weakness points to significant downside risk to consumption and GDP growth,” says Hassan.

Australian trade balance data released at the same time also painted a picture with a backdrop of soft domestic demand.

The Australian trade surplus rose to $1 billion during the month, a stronger number than was forecast, although imports of consumer goods and capital items fell.

Exports picked up during the month although this was driven almost exclusively by an increase in volatile commodity shipments.

“For the September quarter, the trade performance to date has been underwhelming. The monthly trade surplus is running at an average of $0.9bn, a fraction below the June quarter outcome of $1.0bn,” says Andrew Hanlan, a senior economist at Westpac. “The expectation was that the surplus would tend to widen in the period as export earnings received a boost from higher commodity prices."

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Reserve Bank Remains Cautious, Rates Likely On Hold

The Aussie Dollar enjoyed a good run throughout the second and third quarters as markets responded to an improvement in economic fundamentals by beginning to price an eventual withdrawal of RBA stimulus into bond markets for some time in 2018.

“We see the RBA tightening by 50bp in 2018. This would reverse the rate cuts of 2016 and take the real cash back to zero,” wrote David Plank, head of Australian economics at ANZ in a recent note. “After these hikes we see the Bank sitting pat in 2019 as highly indebted households digest the impact of higher rates.”

But the Reserve Bank has remained cautious on rates during its recent policy communications and some strategists saw a hawkish pivot as being contingent on incoming data over the coming weeks, including the August retail sales figure.

“Given that there is crucial data still weeks away (Q3 CPI is due to be released on October 24th), there’s little risk of any action or a hawkish pivot this soon,” wrote Bipan Rai, a macro strategist at CIBC Capital Markets, in a note Monday. “The time for the RBA to turn hawkish will likely come towards the end of this year and into early next year.”

Rai noted similarities between the Australian economy and central bank and those of Canada.

The Bank of Canada has recently begun to withdraw the stimulus it provided to the Canadian economy, in the form of rate cuts, during the oil price collapse. This was after oil prices began to recover and momentum built behind the domestic economy.

Australia is in a similar position in that the economy has now moved past the point where the resource bust posed a headwind to growth. The labour market is recovering and inflation expectations are now trending higher.

But RBA governor Philip Lowe has warned on several occasion now that the bank will need to take record household debt levels into account when it eventually hikes, as a sharp increase in borrowing costs could undermine Australia’s tepid recovery from the commodity price collapse of recent years.

“Today’s data reinforces the RBA’s concern that slow wage growth and rising household debt levels would restrain household spending. These factors will likely continue to limit consumer spending for some time,” says Janu Chan, a senior economist at St George Bank in Sydney.

Charts Show Downside Bias After Trendline Rebuffs Uptrend

The Pound-to-Australian Dollar has pulled-back after touching the downsloping major trendline from the 2015 peak.

The pair has now established a very short-term downtrend after falling for four consecutive days.

This downtrend has also established a bearish sequence of lower lows and lower highs on the four hour chart, also suggesting the trend may have changed.

We now forecast the downtrend will extend lower to the next target at 1.6776 where support from the September 20 lows is likely to kick in.

Such a continuation would be confirmed by a break below today's lows at 1.6825.

A further extension lower would result from a break below the 1.6740 level, which would then be expected to fall to the next target lower at 1.6664, at the level of the 200-day moving average.

Moving averages are dynamic levels of support and resistance which can 'break the fall' of downtrending prices, leading them to stall, bounce or consolidate around their level.