AUD/USD started the week with huge gains but has been in calm waters since then. In the European session, the Australian dollar is trading at 0.6478, up 0.17%.
Retail sales indicate a slowing economy
The RBA’s sharp tightening is affecting economic growth. There was no surprise as retail sales slowed to 0.6% in August, down sharply from 1.6% in July, matching the consensus. The fall in retail sales can be seen as a vindication for the RBA, which surprised the markets with a modest hike of 0.25% this week.
Most analysts had expected one more 0.50% increase before the RBA started to ease up on rates. The central bank was late joining the global dance to raise rates, as Governor Lowe insisted inflation was transient before he finally started to raise rates. Inflation has not let up, running at 6.1%.
The RBA statement acknowledged that inflation has not yet peaked and is expected to rise to 7.75% in 2002 before dropping to 4.0% in 2023. Given that the RBA’s number one priority is lowering inflation, the 0.25% hike caught the markets off guard.
When it comes to loosening policy, the RBA has taken the lead to guide the economy to a soft landing and avoid a recession. Lowe again is marching to his own tune, as the Federal Reserve is expected to deliver at least one more oversized hike of 0.75%. This will widen the US/Australia rate differential and likely put intense pressure on the Australian dollar, which had a disastrous September, declining 6.4%.
The markets are keeping a close eye on US nonfarm payrolls, which will be released on Friday. The ADP employment report showed a slight improvement at 208,000, up from 185,000 (200,000 est.)
ADP is using a new methodology to calculate its readings, but it’s too early to tell if this will improve its reliability in forecasting the official nonfarm payrolls report. The markets are bracing for a decline in NFP to 250,000, down from 315,000.
AUD/USD Technical
- AUD/USD tested resistance at 0.6503 in the Asian session. The next resistance line is 0.6607
- There is support at 0.6433 and 0.6329