Coming up tonight, the Aussie will be in focus with two key economic releases coming out at the same time.
Now with the RBA rate decision behind us, which led to a relatively muted response in the markets, market attention is turning to retail sales and the balance of trade. The latter is turning into a bit of a trendsetter, which isn’t surprising since just under 40% of Australia’s economy is tied up in trade.
Schedule and Expectations
We could see some extra volatility this time around with all the data coming out together at 01:30 on Thursday morning CET (or 19:30 on Wednesday evening EST). Both the retail sales and trade balance are important for the markets for different reasons.
Expectations are for retail sales to move back into positive territory at +0.10%. This is compared to the first drop in five months recorded previously at -0.40%, marking a surprise to the downside from expectations.
We can expect the trade balance to be unusually high at AUD3.00B. But, this will be a step back from the record of AUD3.68 in December. The trade balance has had a habit lately of substantially outperforming analyst expectations.
We should also not forget that the prior months are often revised on both of these data series. So, we could get some market moves even if the data is bang in line with expectations.
Exactly which data bit is likely to move the market is hard to say, because they have different impacts on the currency.
Retail sales are important as a gauge of the health of the economy and inflationary expectation. And this is important in figuring out future monetary policy. As such, the retail sales data could be more useful for insight into market behavior in the future.
The trade balance, on the other hand, is determinant for the value of the currency in relation to others. This is because cash flows are necessary to pay for good exports, so it’s a better measure of the immediate situation. And, given this is data for January, it is a bit delayed.
The trade balance, especially the import component is directly related to retail sales since a substantial amount of Australian spending is on imported goods.
Australian Trade Balance Situation
Commodities are the key export for Australia and are the drivers of the balance. Last Friday we found out that the Commodities index increased by a further 4.8%. It’s now where it was in early 2013, marking one of the highest jumps in recent months.
One of the driving factors is the increase in prices for Australia’s main export: iron ore. As we mentioned previously, at the end of January, iron ore prices jumped following an accident in a major processing facility run by Brazil’s Vale. This led to the company suspending production for an extended period of time. Since then, ore prices subsided a bit. But they remain high at $86.51/ton compared to the $61.30 registered in late November at the beginning of the rising cycle.
The pattern for several months so far has been that exports grew faster than imports. But last month had an exception due to a surprise 6% drop in imports, led primarily by consumer goods. One could interpret this a warning sign for the internal Australian market, even though exports continue to rise healthily.