Australian Dollar, Bond Yields Down on Disappointing Data

How Did the Markets React? 

Economic data out of Australia was not entirely encouraging last night, as the reports indicated that the Reserve Bank of Australia’s three interest rate hikes during 2006 has led debt-laden consumers to pare down spending and borrowing. Building approvals plunged 1.9 percent during the month, bringing the annual rate to a mild -1.0 percent. Additionally, retail sales rose a weaker-than-expected 0.3 percent in December (headline) and 1.3 percent during the fourth quarter (excluding inflation). While the data reflects a slight pickup in spending from the period prior, the cooling effect of the RBA’s monetary policy action last year is more apparent in domestic demand, as the December trade balance (released last week) showed that consumption goods imports fell 0.6 percent during the month. Australian bond markets responded quickly to the economic releases, as yields plunged from Friday’s record highs. Forex traders sold off the Australian dollar briefly, but the impact was minimal as AUD/USD traded in a tight 40 point range for much of the Asian and European sessions. Conversely, equity markets ignored the data at hand and traded instead on a nosedive in commodity prices.

Bonds – Australian 10-Year Treasury Bonds

Yields on Australian 10-year Treasury bond futures plunged from Friday’s highs down 6 basis points to 5.868 percent as economic data failed to warrant concerns that the Reserve Bank of Australia would show a more hawkish edge on Tuesday. Intraday, Australian bonds saw a significant spike in price/yield action on the release of weaker-than-expected retail sales and building approvals. While the building data didn’t bode well for the housing sector, justifying a more bearish yield response in bonds, the figures from the retail sector showed improvements from the month prior, pointing to solid consumption. Nevertheless, price action is likely to be quiet ahead of the RBA’s monetary policy decision as traders wait and listen for biased rhetoric.

FX – AUD/USD

The Australian dollar held within a relatively thin 40 point range in Asian and European trading on mixed economic data out of the country. However, AUD/USD swiftly dropped more than 30 points on the release of weaker-than-expected retail sales and a plunge in building approvals. Nevertheless, the retail report pointed to stronger sales in both December and Q4, which helped keep Aussie elevated. Trading may be quiet ahead of Tuesday’s Reserve Bank of Australia rate decision, and while the central bank is expected to stay neutral at 6.25 percent, any biased commentary emerging from the event could send Aussie reeling.

Equities – S&P/ASX 200 Index

Stocks on the Australian S&P/ASX 200 index fell from a record high on Friday and ended today down 0.2 percent at 5822.10. The Decline was led by the mining sector as metals on the London Metal Exchange tumbled, with zinc plummeting 9.1 percent and copper falling 4.6 percent. BHP, the world's biggest mining firm by market value and production fell 0.7 percent to A$26.41 while Rio Tinto, the second-biggest by market value and third by production, slid 2.3 percent to A$75.49. Meanwhile, economic releases had little impact on equity markets, as Australand Property Group, Australia's fourth-biggest property developer, rose 4.3 percent to A$2.08 despite the discouraging 1.9 percent drop in building approvals. The gain in Australand shares came as the company posted a 21 percent rise in full-year profit to A$243 million.