AUD/USD: Trading the Australia Retail Sales Report

Retail sales in Australia is expected to increase another 0.5% in March, and the ongoing expansion in private sector consumption could lead the local currency to retrace the decline from earlier this week as the recovery in the isle-nation gathers pace.

Trading the News: Australia Retail Sales

What's Expected:

Time of release: 05/05/2011 1:30 GMT, 21:30 EST

Primary Pair Impact:AUDUSD

Expected: 0.5%

Previous: 0.5%

DailyFX Forecast: 0.2% to 0.4%

Why Is This Event Important:

Retail sales in Australia is expected to increase another 0.5% in March, and the ongoing expansion in private sector consumption could lead the local currency to retrace the decline from earlier this week as the recovery in the isle-nation gathers pace. However, as the Reserve Bank of Australia retains its wait-and-see approach in May, investors may continue to scale back speculation for a rate hike in June, and the AUD/USD may face additional selling pressures over the near-term if the sales report falls short of market expectations. According to Credit Suisse overnight index swaps, investors see a zero percent chance for a zero percent chance for a 25bp rate hike on June 7, but see borrowing costs increasing by more than 25bp over the next 12-months as growth and inflation accelerate.

Recent Economic Developments

The Upside

Release	Expected	Actual
Private Sector Credit (MoM) (MAR)	0.4%	0.6%
Westpac Consumer Confidence s.a. (MAR)	--	1.2%
Employment Change (MAR)	24.0K	37.8K

The Downside

Release	Expected	Actual
House Price Index (QoQ) (1Q)	-0.5%	-1.7%
Consumer Prices (QoQ) (1Q)	1.2%	1.6%
Home Loans (FEB)	-2.0%	-5.6%

As private sector credit expands for the sixth consecutive month in March, the rebound in consumer confidence paired with the rise in employment could foster a higher rate of private consumption as the recovery gathers pace. However, as Australians cope with higher prices paired with the aftermath of the natural disaster that hit Queensland, households may scale back on spending and increase their rate of savings, and the central bank may look to retain a neutral policy stance going into the second-half of the year as the economic outlook remains clouded with uncertainties. In turn, the pullback in the AUD/USD may gather pace over the near-term, and interest rate expectations may deteriorate further as the RBA maintains a ‘mildly restrictive' policy stance.

Potential Price Targets For The Release

How To Trade This Event Risk

Forecasts for a fifth consecutive rise in retail sales certainly encourage a bullish outlook for the Australian dollar, and the market reaction following the report could set the stage for a long aussie trade as growth prospects improve. Therefore, if household consumption increases 0.5% or greater in March, we will need a green, five-minute candle following the release to establish a buy entry on two-lots of AUD/USD. Once these precondition are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

On the other hand, household spending may slow in March as Australians cope with higher borrowing costs paired with the aftermath of the flood, and a dismal sales report could exacerbate the near-term reversal in the AUD/USD as interest rate expectations falter. As a result, if sales expands less than 0.3% or unexpectedly contracts from the previous month, we will implement the same strategy for a short aussie-dollar trade as the long position laid out above, just in reverse.

Impact that Australia Retail Sales has had on AUD during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Feb 2011	03/31/2011 00:30 GMT	0.4%	0.5%	+15	+8

February 2011 Australia Retail Sales

Household spending in Australia increased 0.5% in February following the 0.4% expansion in the previous month to mark the biggest advance since July. The breakdown of the report showed a 2.0% rise in demands for household goods, with discretionary spending on apparel advancing 0.9%, while spending on food held flat after expanding 2.6% in January. As private sector consumption increases for the fourth consecutive month, the ongoing improvement within the real economy may encourage the Reserve Bank of Australia to tighten monetary policy further this year, but the central bank looks as though it will retain a wait-and-see approach throughout the first-half of 2011 as the region copes with the natural disaster than ravaged through the region. Indeed, the Australian dollar extended the advance from earlier this year following the data, with the exchange rate rallying to a fresh record-high of 1.0372, but the marked appreciation slowed going into the end of the day as the AUD/USD closed at 1.0328.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com