aud fundamentals

Weekly Outlook: Aussie Optimism Set, How Will Rate Decision Fare?

Friday, 03 March 2006 19:08:03 GMT  |  DailyFX Research Team

The aussie dollar finally broke out of three weeks of consolidation after a well stocked economic calendar last week put the life back into the floundering currencies’ bulls.  Shifting our attention to this week, the schedule is offering a second round of market moving indicators.  Starting the week off on a fast foot will be February’s inflation numbers measured by TD Securities.  While January’s monthly figure shot up to 0.7 percent, the fastest pace in the measure’s short history, the annual gauge was unchanged from the previous month’s 3.1 percent pace. Price growth in February will probably slow dramatically from January’s rate with energy prices contracting from January’s near record high crude.  Similar to the inflation indicator, there are no expectations for Monday’s ANZ job advertisements, but a repeat contraction would not be out of the question with the job market tightening and the available labor pool growing once again.  The market on Tuesday will digest both the Cashcard retail index and Westpac’s industrial trends.  Both indicators will offer a clearer view into business strength and their possible future contributions to growth that is loosing some of its support from domestic consumer spending as well as slipping exports of metals and agricultural goods.  Crossing the hump of the week, the market will assimilate the RBA’s cash rate decision.  Markets continue to expect yet another pass on changing policy in either direction, but recent inflationary figures could have put a hawkish move back onto the outskirts of policy makers’ radar.  The market will filter through any and all comments coming on the back of the decision for any gleam of a chance that inflation is being considered a credible threat to the economy in the medium term.  The RBA, headed by Ian McFarlane, is charged with keeping the annually-based inflation between a 2 and 3 percent tolerance band.  The remaindered of the week will be dedicated to consumer data.  Thursday’s spread offers employment and participation figures for February.  Last month’s jobless rate is expected to stay at its 14 month high, but the expected 10,000 jobs added could come in short if companies had trouble conserving margins in January such as with higher energy bills and a weak AiG services industry figure last week.  Finally, rolling the credits for the market on Friday are lending figures for the first month of the year.  Borrowing for home loans is likely to somewhat reflect last week’s decline in builindg approvals as the housing market continues to cool.  Lending  for investment purposes could also follow its historical trend by dropping especially with the available labor market growing.

Despite a late-week selloff, the aussie dollar made substantial advances last week with a strong 125-pip rally to 0.7485, the highest it has been against the US dollar in a month.   The week began with little to support the eventual rally that would command price action days later.  Simultaneous releases of fourth quarter company profits and inventories kept Friday’s sell-off intact.  Business profits for the final quarter of 2005 were expected to have risen 2.8 percent, but posted at a meager 0.8 percent after expensive raw material prices added more of a burden than strong exports could compensate for.  Continuing the run of bad news, Tuesday’s release of a larger fourth quarter deficit led the aussie lower.  A A$14.45 billion shortfall was the result of fresh highs across energy fields which Australia must import.  After the trade report, the aussie dolar bottomed out at 0.7360 where a strong rally mounted on higher private sector credit numbers.  Consumers used 13.8 percent more credit in January from the year before helping to support domestic spending that has otherwise been waning.  Strong bidding held the pair’s steady ascent through a indicators reporting a drop in new home sales and a slowdown in manufacturing activity in January and February respectively.  This high level of optimism was due to speculation over fourth quarter growth numbers due out Wednesday.  While growth in the quarter fell short of the 3.0 percent pace expected, it was still strong than the 2.5 percent revised number for the three months ending in September.  Growth in the period received a healthy boost from business and consumer spending that has been supported by larger profits and wages.  The aussie’s advance was further accelerated by the largest increase in retail sales in January in seven months.  Momentum behind the aussie dollar run held on as long  as it could, but the exuberance backing it finally lost its footing around 0.7485 after January’s trade deficit more than doubled from the previous month to the largest shortfall on record.   Fallout following the far worse than expected number sent the pair back to 0.7420, but aussie bulls managed to pull the pair up before it could spin into a nosedive to end the week at 0.7445.

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