Australian retail and trade data disappointed the market but strategists are increasingly bullish on the Australian Dollar's prospects

Bureau of Statistics data showed Australian retail sales coming in flat with the previous month, with a 0.0% change, less than the 0.2% growth expected by economists.

Meanwhile, the trade surplus printed its lowest number for three months, at $0.46 billion, a long way below the consensus forecast for a surplus of $0.93 billion.

“Australia’s activity indicators for July came in weaker than expected - retail sales were flat and trade balance was substantially lower than expected,” says Guy Stear, an economist at Societe Generale. "Looking ahead, trade data from mainland China and Taiwan are expected to indicate continued solid momentum as the foreign trade growth across the region has mostly exceeded expectations recently.

Thursday’s data had offered scope for the Aussie to find a floor in the wake of a mildly disappointing GDP report Wednesday, although the actual numbers have led the Antipodean currency to extend its earlier correction.

The Australian-Dollar-to-Pound exchange rate fell 0.27% in London Wednesday, for bids and offers to be accepted around the 0.6123 level, making for a Pound-to-Australian-Dollar rate of 1.6332 on the interbank market.

The Australian-Dollar-to-Euro rate was down 0.33% to 0.6691 shortly after the London open, making for a Euro to Australian Dollar rate of 1.4939.

Relative to the US Dollar, the Aussie traded 0.35% lower at 0.7980, making for a US-Dollar-to-Australian-Dollar rate of 1.2524.

Breakdown of Australian retail sales growth. Source: Westpac Economist Report“Overall, the soft outcome is indicative of the constraints on consumer spending. Though jobs numbers have increased of late, wages growth remains subdued, limiting aggregate incomes,” says Westpac economist Simon Murray

Australian retail sales have grown at a rapid clip in recent months after a dire stretch that ran throughout 2016, although Thursday’s number suggests this expansion moderated going into the third quarter.

The second quarter GDP report, released Wednesday, showed Australian household savings falling throughout the period, indicating that consumers remained confident enough about their own prospects to dip into their savings to fund continued consumption.

“This fits with the RBA’s upbeat view on the economic outlook, is consistent with the next move in rates being up rather than down, and raises the risk that the RBA may hike sooner than we currently expect in 2019,” says Alan Oster, chief economist at National Australia Bank, in response to the GDP number.

Oster flags the prospect of a rate hike from the Reserve Bank of Australia in 2018, instead of 2019, but noted that developments around wage growth and private consumption are key to what the RBA eventually does.

“The AUD sank from $US0.802 to $US0.799, but we are bullish AUD as the underlying story for the economy remains solid and the cash rate won’t be 1.5% forever,” says TD Securities analyst Annette Beacher. “At this stage we stick with a May and November combination for year-end cash rate of 2018.”

The RBA left the cash rate unchanged at 1.50% for the 13th month in a row Tuesday, while Governor Lowe told an audience at a dinner speech that night the long term equilibrium interest rate for Australia will be lower than before, likely around 3.5%.

“We have turned strategically bullish on AUD and adopt a buy -on-dips stance. We now look for AUDUSD to reach 0.84 in 2018,” says Beacher’s New York based colleague, Mazen Issa.

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