The Winner of Oz: Can The AUD Sustain Its Gains?

My esteemed colleague published a piece this weekend where he rightly predicted the Australian Dollar would gap higher on Monday as a result of the Australian elections. Those gaps ranged from +10 pips (AUD/USD) to +33 pips (EUR/AUD) and were a clear indication that dealing desks were pricing in a better business environment under the incoming centre-right Tony Abbott-led coalition than his Labour predecessors Gillard and Rudd. For starters, Abbott has vowed to abolish the controversial mining tax, something Australia may need to keep the Chinese-driven mining miracle moving ahead in the right direction.

With the exception of the US Dollar, however, the Australian Dollar has not been able to sustain these early intra-week gains. What does this week hold for the A$?

RBA last week gave the A$ a bid last week when it kept the Official Cash Rate (OCR) target unchanged at +2.50% and suggested there may not be any additional easing required because plenty of it has yet to transmitted from the monetary pipeline. While this conjures up images of a crude oil facility in Western Australia, it basically means Stevens and company think the next move will be toward higher rates, whenever that may be.

A$ may have gotten its early glory (and gap higher) on the Abbott triumph, and then faded on a pullback in July home loans activity down to +2.4% from the June +2.6% print. Throw a weak ANZ August job advertisements print (-2.0% m/m) into the mix and traders had a reason to throw cold water on the Abbott headline.

A big driver for Aussie may be tomorrow’s September consumer inflation expectations print. The August number came in at +2.3% and A$ may find a bid if consumers anticipate higher prices. NAB August business conditions will also be released tomorrow and an improvement over July’s -7 total could help the Aussie’s cause.

China will report August retail sales data tomorrow, but of greater consequence to the A$ will be August industrial production numbers in China. July industrial production came in at 9.4% and that’s where the print is expected tomorrow. Any sign of fresh vitality in this Chinese sector could bode well for A$.

The markets will get Westpac September consumer confidence on Wednesday and an improvement from August’s 105.7 reading could be positive. Aussie employment data on Thursday may reveal a move higher in the unemployment rate from the July’s 5.7% level.

It will be interesting to see how A$ trades following RBNZ’s interest rate decision on Thursday. There’s obviously no mechanical link between RBA and RBNZ policy, but both economies are susceptible to high bouts of inflation and house prices are torrid in both countries.

If RBA’s publication today of “Issues in Estimating New-Keynesian Phillips Curve in the Presence of Unknown Structural Change” doesn’t float your boat, we’ll get the minutes from RBA’s September Monetary Policy Meeting on 17 September and RBA’s quarterly Bulletin on 19 September followed by its Financial Stability Review on 25 September. RBA Assistant Governor Malcolm Edey speaks on 18 September and our next RBA policy meeting is 1 October.