trading news reports

AUD/USD: Trading the Australia Retail Sales Report

The Australian dollar could to face increased volatility over the next 48 hours of trading as economists forecast retail spending to rise 0.3% in October after unexpectedly contracting 0.2% in the previous month, and a rebound in household consumption is likely to encourage an improved outlook for future growth as the $1T economy skirts the global recession.

Trading the News: Australia Retail Sales

What’s Expected
Time of Release:        12/03/2009 0:30 GMT, 19:30 EST
Primary Pair Impact :    AUDUSD
Expected:         0.3%
Previous:         -0.2%

Impact Australia Retail Sales has had on AUDUSD over the last 2 months

September 2009 Australia Retail Sales

Retail spending in Australia unexpectedly contracted 0.2% in September after rising a revised 0.7% in the previous month, and households may continue to scale back on consumption going into the following year as policy makers anticipate the labor market to weaken further in 2010. The breakdown of the report showed discretionary spending on food held flat during the month after rising 1.1% in August, while demands for apparel slipped 0.8% from the previous month, and policy makers may continue to hold a cautious outlook for the real economy as the government stimulus begins to taper off. Nevertheless, Treasury Wayne Swan held an improved outlook for the region as he expects economic activity to expand faster than initially expected, and the Reserve Bank of Australia may continue to normalize policy over the coming months as the isle-nation skirts the global recession.

August 2009 Australia Retail Sales

Private consumption in Australia increased 0.9% in August to top forecasts for a 0.5% rise, and the rebound in domestic demands encourages an improved outlook for future growth as the $1T economy skirts the global recession. A deeper look at the report showed department store sales advanced 2.4% after rising 2.5% in July, with discretionary spending on food increasing 1.8% from the previous month, while demands for household goods rose 0.9% in August. As growth prospects improve, market participants anticipate the Reserve Bank of Australia to lift borrowing costs from the emergency level and begin to normalize policy over the coming months as the economic outlook improves, and the central bank may hold a hawkish policy stance going forward as the board forecasts economic activity to expand at an annual pace of0.5% this year and 2.25% in 2010.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on AUDUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on AUDUSD ahead of the data release.

How To Trade This Event Risk

The Australian dollar could to face increased volatility over the next 48 hours of trading as economists forecast retail spending to rise 0.3% in October after unexpectedly contracting 0.2% in the previous month, and a rebound in household consumption is likely to encourage an improved outlook for future growth as the $1T economy skirts the global recession. A report by the Australian Bureau of Statistics showed the isle-nation unexpectedly added jobs for the second consecutive month in October as business confidence jumped to its highest level in nearly six-years, and firms may continue to raise their willingness to increase their labor force as China, Australia’s biggest trading partner, leads the global recovery. However, a separate report showed private-sector credit held flat in October after contracting 0.1% in the previous month, while the Westpac confidence index slipped 2.5% in November as consumers lowered their outlook for future growth, and households may increase their temperament to save as policy makers anticipate the jobless rate to rise going into the following year. Nevertheless, the Reserve Bank of Australia hiked the benchmark interest rate by another 25bp to 3.75% this month as the global economy returns to growth, and said borrowing  costs will continue to rise in order  to balance the risks for growth and inflation. Moreover, the RBA said that household wealth has recovered noticeably following the expansion in monetary and fiscal policy, and expects unemployment to peak at a lower level than initially expects as policy makers see early signs of improvement in the labor market. At the same time, the central bank noted that the marked appreciation in the Australian dollar is likely to damp price pressures going forward, and reiterated that the rise in the exchange rate is likely to hamper the outlook for global trade as the AUD/USD continues to approach parity. However, Treasurer Wayne Swan said the jobless rate will continue to rise as spare capacity remains throughout the real economy, and held a cautious outlook for private spending as households face a weakening labor market paired with tightening credit conditions. Meanwhile, RBA Deputy Governor Ric Battellino held an improved outlook for the region and said that the nation has initiated a “new upswing” as the region skirts the global recession, and anticipates the rise in growth to last for a “few more years” as the nation continues to benefit from the expansion in the emerging economies.

Trading the given event risk favors a bullish outlook for the Australian dollar as market participants anticipate retail spending to rebound in October, and price action following the sales report could set the stage for a long aussie-dollar trade as growth prospects improve. Therefore, if domestic demands increase 0.3% or greater from the previous month, we will look for a green, five-minute candle following the report to generate a buy entry on two-lots of AUD/USD. If these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.

On the other hand, fears of a protracted recovery paired with expectations for higher unemployment may lead households to scale back on consumption and ramp up their rate of savings, and an unexpected drop in retail sales could drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if household spending falls 0.1% or more in November, we will favor a bearish outlook for the Australian dollar, and will follow the same strategy for a short aussie-dollar trade as the long position laid out above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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