-Australian retail sales rebound from two-month malaise.

-Comes after RBA leaves rates unchanged but calls wages trough.

-Strategists still bearish on the Australian Dollar in the short term.

© Taras Vyshnya, Adobe Stock

The Australian Dollar rose during early trading in London Wednesday as markets responded to the latest retail sales report from down under, which showed consumer spending rebounding from an earlier slump during February.

Australian retail sales rose by 0.6% during the month, up from an upwardly revised 0.2% growth in January and far ahead of the consensus for a more meagre 0.3% uptick in consumer spending. On a “seasonally adjusted basis” retail sales rose by 0.4%.

Household goods retailing provided the strongest contribution to growth, followed by food, cafes, clothing and the “other” category, according to the Australian Bureau of Statistics release.

“The 0.4% rise in February follows growth of 0.3% in each of the previous months. Annual trend growth picked up to 2.7% in February from 2.3% in January,” says John Peters, a senior economist at Commonwealth Bank of Australia. “While it might be too early to crack open the champagne, it may be time to at least put the champers in the ice bucket. Watch this space in coming months!”

Retail sales had disappointed the market for two consecutive months as the December data was adversely impacted by households having brought Christmas spending forward into November for the sake of Black Friday sales while January data also left a lot to be desired. Wednesday's figures may now have drawn a line under this period of underperformance.

The AUD/USD rate was quoted 0.14% higher at 0.7692 during early trading in London Wednesday while the Pound-to-Aussie rate was 0.16% lower at 1.8284.

“The continuing very positive impact on the retail sector from ongoing strong employment growth and a buoyant tourism and education sectors looks likely to continue to be largely offset by historically soft wages growth and still reasonably wary consumers labouring under the yoke of record high levels of household debt,” Peters says. "We will need to see some further solid growth numbers in the months ahead to make the call of a sustained solid pickup in retail activity.”

Markets watch retail numbers closely in an effort to gauge the condition of Australian household finances and for insight into the likely pace of economic growth in a given quarter. Australian data have disappointed of late and, with household debt levels high and wage growth having been subdued for some time now, there are concerns that consumer spending would offer only diminishing support to the economy in the quarters ahead.

"We are focused on AUDUSD where the pair approached the 3yr trend support located around 0.76. While it bounced higher today, against a backdrop of softer data, contentious trade rhetoric, more lively equity vol, we see little reason to be owning AUD at the moment. In this regard, we do not rule out a move towards the 50% fibo retracement area of the cyclical lows and 2018 highs around 0.7480/0.7500," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities.

Wednesday's price action came closely on the heels of another monologue from the Reserve Bank of Australia offering an optimistic take on the domestic economy and a slightly more upbeat assesment of the outlook for wages. Although few strategists appear to have taken this as an indication that a change in monetary policy is on the horizon.

"Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills," says Philip Lowe, governor of the RBA, in a statement.

It goes almost without saying that Lowe and the RBA board opted to hold Australia's cash rate at a record low of 1.5% for the 20th month Tuesday, citing below-target inflation, continuing slack in the labour market and a litany of risks to the bank's outlook for the economy.

However, the Australian Dollar received a boost during overnight trading and through the London session Tuesday. The Aussie's was at least to some extent the result of a more "risk-on" environment for markets but, having begun when the RBA announced its decision, the small Dollar's gains may have been partly related to Lowe's references to a tightening labour market. These could have spurred hopes in some parts that the RBA may soon begin to sound a bit more "hawkish".

"Coming on top of the weakness of the housing market and sluggish wage growth, it is becoming even more likely that the RBA will leave policy unchanged until late-2019," says Paul Dales, an economist at Capital Economics.

The Reserve Bank of Australia forecasts that inflation will be a little above 2% by the end of 2018 but has persistently flagged debt laden households and weak pay growth as impediments to so called monetary policy normalisation which, in the case of Australia, would be where interest rates are lifted from their record lows and gradually returned to more normal levels.

"We expect the RBA to leave the cash rate at 1½% until November 2018. The key risk to this view is that the RBA will wait a bit longer (ie HI 2019) before moving given the absence of any intensifying wage or price pressures to date and widespread evidence of moderating house prices. Current market pricing has the first rate rise fully priced in around June 2019," says Commonwealth's Peters.

Advertisement

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.