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AUD/USD: Trading the Australia Retail Sales Report

AUD/USD: Trading the Australia Retail Sales Report

2011-03-29 19:26:00
David Song, Currency Strategist
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Trading the News: Australia Retail Sales

What’s Expected:

Time of release: 03/31/2011 00:30 GMT, 20:30 EST

Primary Pair Impact:AUDUSD

Expected: 0.4%

Previous: 0.4%

DailyFX Forecast: 0.0% to 0.2%

Why Is This Event Important:

Household spending in Australia is projected to increase another 0.4% in February, and the rise in private sector consumption could instill a bullish outlook for the local currency as the economic recovery gathers pace. However, as the Reserve Bank of Australia maintains a “mildly restrictive stance” for monetary policy, higher borrowing costs are likely to impeded on private sector consumption, and the central bank may retain its wait-and-see approach throughout the first-half of the year as the region copes with the slew of natural disasters. In turn, household spending may waver over the near-term, and the central bank may talk down speculation for another round of monetary tightening as the outlook for growth and inflation remains battered.

Recent Economic Developments

The Upside

Release

Expected

Actual

GDP (4Q)

0.7%

0.7%

Average Weekly Wages (QoQ) (NOV)

--

1.1%

Private Sector Credit (MoM) (JAN)

0.3%

0.3%

The Downside

Release

Expected

Actual

Employment Change (FEB)

20.0K

-10.1K

Home Loans (JAN)

-1.0%

-4.5%

Westpac Consumer Confidence (MAR)

--

-2.4%

As wage growth in Australia accelerates, with private sector credit expanding for the fourth consecutive month in January, households may increase their rate of consumption as the economic recovery gathers pace. However, as consumer confidence wanes, with the rebound in employment tapering off, households may scale back on spending as the economic outlook remains clouded with high uncertainty. In turn, an unexpected drop in retail sales is likely to dampen the prospects for future growth, and the RBA is likely to maintain a cautious tone for the real economy as the wave of natural disasters bear down on the recovery.

Potential Price Targets For The Release

AUDUSD_Trading_the_Australia_Retail_Sales_Report_body_ScreenShot013.png, AUD/USD: Trading the Australia Retail Sales Report

How To Trade This Event Risk

Expectations for a fourth consecutive rise in retail sales certainly instills a bullish outlook for the high-yielding currency, and the market reaction following the report could set the stage for a long Australian dollar trade as growth prospects improve. Therefore, if household spending increases 0.4% or greater in February, we will need a green, five-minute candle subsequent to the release to generate 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 from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

On the other hand, households may curb their temperament to spend as they cope with higher borrowing costs paired with the slew of natural disasters, and a dismal sales report is likely to bear down on the exchange rate as investors scale back speculation for another round of monetary tightening. As a result, if retail spending expands less than 0.2% or unexpectedly weakens from the previous month, we will carry out the same strategy for a short aussie-dollar trade as the long position mentioned above, just in the opposite direction.

Impact that Australia Retail Sales has had on AUD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jan 2011

03/01/2011 00:30 GMT

0.3%

0.4%

+9

-51

January 2011 Australia Retail Sales

Retail spending in Australia increased 0.4% in January after expanding 0.2% in the previous month, but the devastating flood in the region is likely to dampen the outlook for private sector consumption as households cope with rising food and energy prices. The breakdown of the report showed spending on food increased 2.5% during the month, with department store sales advancing 2.3%, while demands for household goods tumbled 1.6% from the previous month to mark the first decline since July. As the Reserve Bank of Australia sees “subdued growth in consumer spending,” the central bank may see scope to keep the benchmark interest rate at 4.75% throughout the first-half of the year, and Governor Glenn Stevens may continue to talk down speculation for higher borrowing costs as the economic outlook for the world economy remains clouded with high uncertainty. Indeed, the Australian dollar pushed higher following the release, with the AUD/USD breaching 1.0200, but the market reaction was short-lived as the pair ended the trading session at 1.0130.

AUDUSD_Trading_the_Australia_Retail_Sales_Report_body_ScreenShot014.png, AUD/USD: Trading the Australia Retail Sales Report

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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