AUD/USD: Trading the Australia Retail Sales Report

Trading the News: Australia Retail Sales

Why Is This Event Important:

However, the Reserve Bank of Australia may keep rates on hold for the second time as the European debt crisis weighs on the global financial system, and uncertainties clouding the outlook for future growth could lead the central bank to maintain a neutral policy stance over the coming months.

What’s Expected:
Time of release:        07/01/2010 1:30 GMT, 21:30 EST
Primary Pair Impact :    AUDUSD
Expected:         0.3%
Previous:         0.6%

Will This Be Market Moving (Scenarios):

Household spending in Australia is forecasted to increase another 0.3% in May as the labor market improves, and the data could spark a bullish reaction in the Australian dollar as the recent developments reinforce an enhanced outlook for future growth. However, rising borrowing costs paired with tightening credit conditions could push individuals to scale back on consumption, and a dismal sales report is likely to drag on the exchange rate as policy makers continue to see some weakness in the private sector.

The Upside
The drop in the jobless rate paired with the expansion in job openings certainly bodes well for private spending, and consumers may increase their willingness to spend as private sector activity improves. As a result, a larger-than-expected rise in sales could lead RBA Governor Glenn Stevens to raise the economic assessment for the region and lead the central bank to normalize monetary policy further in the second-half of the year.

The Downside
At the same time, the recent drop in household sentiment paired with the pull bank in lending activity could lead to an unexpected slump in private consumption, and a dismal sales report could lead the central bank to maintain a neutral policy stance next month as it aims to encourage a sustainable recovery. As a result, a drop in consumption could drag on the exchange rate and lead the Australian dollar to retrace the advance from earlier this month as investors scale back expectations for a rate hike.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the high-yielding currency as market participants expect household spending to increase further in May, and the data could set the stage for a long Australian dollar trade as the outlook for future growth improves. Therefore, if households spending expands 0.3% or greater from the previous month, we will need to see a green, five-minute candle subsequent to the release to establish a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its target in order to preserve our profits.

On the other hand, the slump in consumer sentiment pared with greater borrowing costs could weigh on household’s willingness to spending, which could lead to a dismal sales report and drag on the exchange rate as investors weigh the outlook for future growth. As a result, if retail sales rises unexpectedly contracts in May, we will favor a bearish outlook for the high-yielding currency, and will implement the same strategy for a short aussie-dollar trade as the long position laid out above, just in reverse.

Impact Australia Retail Sales has had over the AUD during the past month

April 2010 Australia Retail Sales

Retail spending in Austral advanced 0.6% in April, which exceeded forecasts for a 0.3% expansion, and conditions are likely to improve going forward as the $1T economy skirts the global recession. The breakdown of the report showed discretionary spending on apparel increased 0.% following at 1.5% jump in March, with demands for household goods advancing 2.6%, while department store sales slumped 2.4% following the 1.2% rise in the previous month. As the rebound in economic activity gathers pace, the Reserve Bank of Australia is likely to normalize monetary policy further in the second-half of the year, and the central bank may raise borrowing costs higher over the coming months in order to balance the risks for the economy. However, the central bank is widely expected to keep rates on hold at its next rate decision as the board assesses the impact of its recent rate hikes, but hawkish comments following the meeting could drive the Australian dollar higher as investors weigh the prospects for future policy.

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.

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