Aussie weakness, retail sales and the RBA

 

AUD/USD

The AUD has been weak this week. Weaker than you would have expected given problems in the US with the economy and Moodys threats on the US credit rating. At 1.07 it is nowhere near as strong as it should have been in the circumstances if it was only about the USD. 

But obviously it’s not just about the USD. We always talk about our 5 drivers model which we think are the keys to the AUD’s moves. To recap the drivers are,

  • Domestic growth and Interest rate differentials
  • Global Growth and Commodities
  • Investor Sentiment (risk appetite)
  • Technicals and
  • The USD

So if it was just the USD then AUD would be higher.

But for me the key driver at the moment is the creeping global economic malaise which is sapping investor sentiment and threatening commodity prices along with a domestic economy that just printed a negative GDP number. The technical picture, as you can see in the chart above, is that the AUD is in a short-term cyclical downtrend within its one year uptrend after the rejection of a very important level at 1.1014 a month or so ago. This level represents the 61.8% retracement of the 1971-2001 move lower and while somewhat long-term and obscure it is a reasonable point for the market to pull up. We called the top on the day over at MacroBusiness before we started the Lighthouse Blog.

For me the biggest indication that the worm is turning for the AUD is the AUD/CHF rate. I believe it’s both sides of the risk coin. AUD, world’s favourite punt – CHF, world’s ultimate safe haven. As the chart shows this rate has been much lower recently.

So AUD remains in a consolidation pattern below the really important 1.1014 level. If Janet Yellen is right about what she said yesterday and there is more leverage in the market than we think then expect it to be volatile but with a bias lower.

RETAIL SALES

We’ve been busy over the past few days analysing the GDP, Retail sales, impact of the floods and implications for RBA next week. First off lets say while they are still in the game for a Tuesday move we reckon they’d be mad to hike and we trust that they will dig a little deeper than the straight 1.1% unexpectedly strong rise that was in evidence in April.

Clearly we have a more jaundice view of the economy currently than the RBA so use your filter on this (we don’t differ however with the long-term structural impact of Chindia). But we’ve done some digging and we reckon that the floods played a huge roll in the jump. Here is a post we did over at MacroBusiness this morning which shows that something like 1.6 billion in excess insurance claims, over the 3 year average quarterly pay-out, was made in the first quarter of 2011. On any given month this represents 7.5% or more of total retail turnover. Here is better chart we’ve built

This is data from the national accounts on the dollar value of non-life insurance claims each quarter as shown in the ABS GDP release. The red line is the trend with the white line the nominal value. you can see a massive uptick from trend in Q1 2011 Clearly not to be sneezed at in terms of its impact on retail sales as people replace items lost. 

However, while we know when it was paid we don’t know when it was spent but it’s probably fair to say that there are still flood related impacts filtering through the economy and distorting the data. Unlike the GDP data Wednesday, this time to the upside.

Pundits also are all now questioning the data because so much of the retail sales uptick seems to have been sourced in Victoria and spent on shoes. Starting to look like a rogue number only time will tell I guess. You know our view.

RBA

What’s does this week’s data mean for the RBA.

They are still in play over the next few months although we can’t imagine a June hike.  As the new Secretary to the Treasury, Martin Parkinson is reported in todays Sydney Morning Herald to have said .

“Mining is 8 per cent of gross domestic product … but there’s a very important 92 per cent of GDP which is out there which for some reason we have stopped talking about.”

We agree and Mr Parkinson now sits on the Reserve Bank Board so we can trust that the RBA will now consider, as they always have no-doubt, the rest of the economy. particularly, we hope, households. It is too soon for a rate hike whatever the long-term positives for the economy coming down the line.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

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