Australian Dollar Continues Recovery After Leading Indicators Data

THE TAKEAWAY: Mild Drop in Australia Leading Economic Indicators > Construction Shows Continued Weakness, But Corporate Profits Strong > AUDUSD Continues Upward Correction

Source: FXCM Strategy Trader

The Australian Dollar continued its recovery following the Conference Board’s announcement that the Leading Economic Index fell 0.1 percent, stronger than June’s reading of -0.5 percent (which was revised up from -0.8 percent). The LEI data – which presents a less dire economic outlook than widely expected – provided momentum to AUDUSD, which rose over 50 pips before retracting these gains. However, the overall upward correction from Thursday’s sell-off remains intact.

Of the seven constituent indicators of the LEI, five rose. The positive drivers were led by gross operating surplus – a measure of corporate profitability – and money supply. Sales-to-inventories also rose, though at a more modest pace, pointing to continued uncertainty in the retail market. At the same time, a sharp fall in building approvals more than offset these positive contributors, suggesting ongoing softness in the Australian real-estate market.

Friday’s 0.1 percent drop in the LEI marks the second consecutive monthly contraction. The data comes following a Westpac Leading Index release earlier in the week, which rose 0.5 percent, also on the back of strong corporate earnings. This, in addition to reduced rate-cut speculation following an unexpectedly hawkish tone in the RBA minutes, triggered a rally in the Aussie earlier in the week. The currency has since fallen below parity versus the USD as part of a massive sell-off of the S&P and other risky assets after the Fed fell short of announcing QE3 and revised its economic outlook downward.

Data Source: Bloomberg

With both a technical rebound and recent indicators pointing to a mild, if not strong, economic environment, the Aussie can be expected to extend its recovery from Thursday’s sell-off. However, with the Credit Suisse rate expectations index still pricing in a 150 basis-point cut by the RBA over the next 12 months, in addition to the IMF lowering Chinese growth forecasts, there will be further headwinds for the Aussie over the foreseeable horizon. The upward correction could represent only a temporary respite from selling pressure.