aud fundamentals

Weekly Outlook: Aussie Confidence Glows But Can't Thwart Sharp Sell Off

Friday, 17 March 2006 19:48:07 GMT  |  DailyFX Research Team, strategist@fxcm.com

The Australian dollar tried to take another break from its painfully slow descent braced by sunny consumer and business optimism, but a late week drop put the currency back on the chopping block.  This week’s scheduled indicators, though slightly more common and accessible to the market, will likely hold less significance to fundamental traders than did last week’s.  First out of the gates for aussie dollar traders to digest will be Tuesday’s release of dwelling starts for the final quarter of 2005.  Following the third quarter drop in starts, there may have been little to encourage Australians to take on a new, expensive investment in real estate. With lending rates holding pretty steady over the untouched 5.50 percent overnight lending rate for the entirety of the quarter, demand would have to come from other sources.  Consumers had to adjust to more expensive energy prices and a rising jobless rate from 29-year lows set a few months before.  More timely, monthly data doesn’t suggest a rise in store for the period.  Changes in building approvals and home loans were relatively small.  Following on this piece of data, Wednesday, the last day for scheduled economic data, will offer leading index, an employment indicator and vehicle sales figures.  Westpac’s leading composite index for January is the most comprehensive indicator for the day.  The index, compiled by the Melbourne Institute and Westpac, slowed to 0.3 percent growth in December after two months of 0.6 percent rises.  January’s economic picture was looking sour, denoting a possible further contraction.  Over the month the trade deficit ballooned, building permits plunged and retail sales were unchanged.  Employment data will likely hold the trend of negative releases.  Australia’s most up to date employment indicator, the skilled vacancies index released by the Department of Employment and Workers Relations, has contracted for the previous 11 months as companies continue to hire at an aggressive pace.  Both the pace of hiring and the vacancy indicator, however, have taken turn for the worst over the past four months.  The only other indicators to hold traders over for the remainder of the week are vehicle sales over the month of February.  Economists predict a 2.5 percent drop in purchases with higher petrol prices weighing more heavily on consumer’s minds than a tick lower in the jobless rate and growth unquenchable wage growth.

The Aussie dollar began last week a bit tender from the previous five-day spanning 175-pip decline.  With this in mind the market approached the first indicator the week had to offer, the Manpower Employment Outlook with some skepticism.  Neither good nor bad, the outlook posted a 20 percent –indicating employers plan on increasing their hiring practice in the second quarter.  The market responded with a conservative rise that found a second wind on Tuesday’s session.  The only indicator release for the day came from February’s business confidence indicator rose to a one year high as profit margins widened and orders soundly outpaced existing capacity.  In response to the release, the value of the currency rode another wave higher.  This business confidence number didn’t seem to be fully digested by the market though.  When Wednesday’s consumer sentiment indicator rose 1.3 percent for the current month, bids flooded the market.  March’s figure was the third consecutive rise in the indicator but was also the third consecutive month it slowed its growth pace.  Typically a leading indicator amongst older data releases, this confidence number could provide a useful clue to spending habits and the state of the economy for March, a month or two months before the actual data points pertaining to each area are actually released.  With two confidence indicators under its belt, the aussie dollar rose to the week’s high point at 0.7413.  From there however, as you probably already discerned, price action was in the hands of the bears.  Starting the initial decline was the RBA’s February Bulletin.  In the monthly posting by officials that are in control of the country’s monetary policy, the wording for expected future rate changes was kept largely the same, however, one fact caught market participants’ eyes.  Verbiage in the statement reduced the urgency for the next interest rate change to be up, though it was blatantly stated to be the likely move.  Also released for the day were reductions to consumer inflation expectations to levels within the policy board’s tolerance levels.  A first round, 50 pip sell off was instituted; but after the data had time to marinate, traders began dumping aussie in Friday’s session to erase 110 pips of value against the US dollar.

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