AUD maintains gains despite soft retail sales figures

Jan 11, 9:07 am
Australia

Last week, Australia posted a trade surplus of $1.2 billion in November, which was the first time since March 2014. November’s trade surplus came after October saw a deficit of $1.1 billion which was higher than the forecasts of $0.5 billion in deficit. Most of the surplus came from higher commodity prices than import volumes which were largely unchanged. Exports accounted for nearly 8.4% increase on a month over month basis in value and were the highest since April 2011. Driving exports higher was an 11% monthly gain in iron ore exports and a 26% increase on a monthly basis in coal exports and 22% increase on meat exports on a monthly basis.

Paul Dale from Capital Economics said in a note that the increase in export values was mostly on account of the increase in prices and had nothing to do in terms of volume of exports. He also cautioned that while trade surplus showed higher commodity prices rising national incomes, there is no evidence of higher real GDP in the economy.

Earlier this week, the Australian government released new forecasts which painted a gloomy picture for Iron ore prices. According to officials, iron ore prices are set to fall by nearly half from its current value by 2018, or about $46.70 a ton, compared to the current levels of $80 a ton. Officials said that the current price of iron ore was supported by a renewed demand from China but cautioned that this demand is unlikely to continue in the coming years.

The Department of Industry, Innovation and Science lowered its iron ore exports forecasts by 2% to 832.2 million tons for the fiscal year of 2016 and 2017. Following the lower forecasts, shares in the country’s main mining companies such as Fortescue Metals and BH Billiton and Rio Tinto fell sharply.

Retail sales rise less than forecast in November

Australia Retail sales November 2016 (Source: ABS)
Australia Retail Sales November 2016 (Source: ABS)

On Tuesday, the monthly retail sales figures released showed that the Australian retail sales rose 0.2% on a month over month basis in November on a seasonally adjusted basis. The data from the Australian Bureau of Statistics shows an increase of 25.664 billion in value during the reported month. The headline figure was weaker than what economists penciled in, coming in below the 0.4% forecast and slower than October’s 0.5% increase.

In terms of category, food retail rose 0.4% while clothing, footwear, and personal accessory retailing rose 1.7% and household goods rising 0.2%. Economists maintain that consumer spending will be one of the crucial factors in determining the risks to growth this year. The Australian economy posted a contraction in the third quarter of 2016 for the first time since 2011. Prior to the contraction in growth, the Australian economy enjoyed one of the longest expansion streaks in GDP without a recession among the developed economies.

AUDUSD – Technical correction nearing completion

The Australian dollar brushed aside the weak numbers as the Aussie maintained its bullish momentum against the U.S. dollar. AUDUSD was seen posting a strong reversal after previously falling to a 7-month low in mid-December last year.

The daily chart for AUDUSD shows the reversal off the 127.2% mark of the bearish flag pattern. The current pace of gains is likely to see AUDUSD potentially push towards 0.7440 to retest the breakout from the bearish flag pattern, following which a reversal near 0.7440 could see renewed bearish momentum take over the currency.

AUDUSD Daily Chart: Watch for resistance at 0.7440
AUDUSD Daily Chart: Watch for resistance at 0.7440

Alternatively, a reversal before reaching 0.7440 could trigger a short-term correction back to 0.7184 but would put the downside bias at risk.

Traders should watch the daily Stochastics on AUDUSD for a possible hidden bearish divergence pattern that could confirm a reversal either at 0.7440 or at 0.7310.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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