AUD/USD: Trading the Australian Retail Sales Trend Index

The Australian dollar could face increased selling pressures over the next 24 hours of trading as economists forecast private-sector spending to weaken further in November. The economists anticipate retail spending to rise only 0.1% after gaining 0.2% in October as consumers continue to face falling home prices paired with a rise in unemployment.

What’s Expected

Time of release:                  01/07/2009 00:30 GMT, 19:30 EST

Primary Pair Impact :          AUDUSD

Expected:                              0.1%

Previous:                               0.2%

Effect the Australia Retail Sales Trend had over EURUSD for the past 3 months

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October 2008 Australia Retail Sales Trend

Retail spending rose 0.2% in October amid expectations for a 0.1% gain. The breakdown of the report showed that discretionary spending on clothing fell 0.2%, while food sales rose another 0.6% from September. Weakening demands from home and abroad have certainly lowered growth prospects for the export-driven economy, and conditions are likely to get worse as global credit conditions remain far from normal. In response to the significant downturn in the global economy lead the RBA to lower the benchmark interest rate by 100bp to an eight year low of 4.25% in December, and may continue to ease policy over the coming months in order to avoid a recession. Mounting growth fears paired with a narrowing interest rate outlook suggests that the Australian dollar is likely to weaken further against its currency counterparts as investors curb their appetite for risk.

September 2008 Australia Retail Sales Trend

The Australian retail sales trend index rose 0.2% in September as policymakers increased their efforts in response to the downturn in the global economy. A deeper look into the report showed that demands for household goods fell 0.6%, while spending of food rose 0.6% from the previous month. RBA Governor Glenn Stevens lowered the benchmark interest rate by 100bp to 6.00% during the month, which was the largest reduction since 1992, and is widely expected to cut borrowing costs further in order to keep the $1T economy afloat. Despite the extraordinary efforts taken on by the central bank, fading demands from abroad will continue to drag on the export-oriented economy, and as inflation remains well above the RBA’s 2-3% target, policymakers will have a difficult time in balancing their dual mandate to ensure price stability while fostering economic growth.

August 2008 Australia Retail Sales Trend

Discretionary spending rose  more than expected in August as the retail sales trend index increased 0.3% amid expectations for a 0.1% gain. The breakdown of the report showed that food sales rose 0.5% for the third consecutive month, while clothing sales increased 0.5% from July. Despite the resilience in the domestic economy, fading demands from the global economy reflects a dour outlook for the export-based country, which lead the Reserve Bank of Australia to lower borrowing costs for the first time in seven years in response to the spillover effects of the credit crunch. RBA Governor Glenn Stevens took a preemptive approach to support economic growth as the central bank cut the benchmark interest rate by 25bp to 7.00%, and is widely expected to ease policy further over the coming months as growth prospects deteriorate.

How To Trade This Event Risk

The Australian dollar could face increased selling pressures over the next 24 hours of trading as economists forecast private-sector spending to weaken further in November. According to a Bloomberg News poll, the median forecast amongst 10 economists anticipate retail spending to rise only 0.1% after gaining 0.2% in October as consumers continue to face falling home prices paired with a rise in unemployment. The $1T economy lost 15.6K jobs in November, which raised the jobless rate to 4.4% from 4.3%, and the labor market is likely to weaken further as firms cutback on production in response to the significant slowdown in the global economy. Fading demands from home and abroad pushed the quarterly growth rate to its lowest level in eight years as the economy grew 0.1% from the second quarter, and conditions may only get worse as growth prospects deteriorate at a record pace. Business confidence fell to -30 from -29 in October to reach its lowest level since recordkeeping began in 1989, which has fueled speculation that the economy could slip into a recession for the first time in seventeen years. Mounting growth fears lead policymakers to step up their efforts throughout the second half of 2008, and the Reserve Bank of Australia is widely expected to ease policy further over the coming months in order to keep the economy afloat. The central bank lowered the benchmark interest rate by 100bp to a six-year low of 4.25% in December, and is widely anticipated to lower borrowing costs further in February as RBA Governor Glenn Stevens expects firms to cutback on ‘plans for investment and hiring.’ In addition, Mr. Stevens went onto say that ‘there is scope to do more’ as price pressures alleviate, but added that the extraordinary efforts by policymakers should present  ‘significant’ economic support going forward.

Nevertheless, the preemptive approach taken on by the RBA has certainly helped to boost consumer confidence over the past two months, and as inflation expectations remain well anchored, lower living costs could help to counteract the downturn in the economy. As a result, a rise in retail sales of 0.2% or greater would set the stage for a long AUDUSD trade, and with our expectations in hand, we will look for a green, five-minute candle following the release to confirm an entry on two lots of the aussie-dollar. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Conversely, the ongoing downturn in the housing market paired with financial uncertainties could weigh on consumers as market participants expect the export-oriented country to slip into a recession this year, and a dismal sales reading is likely to stoke increased selling pressures for the Australian dollar as the downside risks for growth intensify. Therefore, a contraction of 0.2% or more in private-spending would favor a short AUDUSD trade, and we will follow the same setup as the long trade listed above, just in reverse.