The Australian Dollar fell against the British pound and most counterparts on Monday, March 3 after the release of February Retail Sales data showed Australian shoppers keeping a lid on spending during the month.

Retail Sales were -0.1% lower in February, well below the 0.3% rise expected, and January’s 0.4% increase over December.

The contraction will fuel economist’s concerns about falling inflation and stagnant wages.

The Australian Dollar fell from 1.6550 to the Pound to 1.6535 after the release.

Whilst showing a notable decline, the release still arguably fell within the established parameters of a long-term range as illustrated by the chart below showing Retail Sales results over the last 10 years.

One seasonal factor which came into play was that poor weather was a factor in keeping people away from the shops as it rained more than usual in the eastern provinces in February.

“There was an element of weather interruption to retail sales growth, however, as the clothing and footwear sector was the main contributor to the decline and the usually strong contributors to growth - café and restaurant dining and recreation – were flat. There was a lot of rain in the eastern state capitals in February,” says Credit Agricole’s Manuel Oliveri in a note seen by Pound Sterling Live.

Iron Ore, No More

The Aussie Dollar was also hit by Chinese data which crystallised negative sentiment concerning iron ore, Australia’s premier export, after it showed stockpiles in China reaching a record surplus levels.

“Iron ore prices were a little lower on the China PMI data as well as new data showing that inventories at Chinese ports and steel mills hit new highs in March,” said Oliveri.

The Australian Dollar is heavily correlated with the price of iron ore so a decline is likely to weigh on the currency.

But There's a Building Boom

One bright spot for the Australian Dollar in the economic data flow at the start of the new quarter was the 8.3% rise in Building Approvals, when economists had only expected a -1.0% decline!

However, the surge may well play into concerns that the country’s housing sector is forming a price bubble which could cause financial stability risks.

With the Reserve Bank of Australia (RBA) scheduled to meet on Tuesday to set interest rates, the uneven data presents the board with a challenge.

Continued low inflation out down to stagnant wages and falling consumer spending deserves a dovish reaction from the RBA (dovish meaning biased towards cutting interest rates), however, the house price bubble, especially in the cities calls for higher rates. The Reserve Bank cannot do both.

One possibility is that the RBA will announce targeted measures to stem mortgage lending; few expect a change in interest rates.

But we would urge those with an interest in the Aussie Dollar's value to watch the words of the RBA - will they try to talk down the value of the currency?

This could be a real possibility as the real effective AUD exchange rate is above levels the RBA has been happy with on an historical basis.

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