Enjoy the Aussie Dollar's bounce while it lasts - domestic settings are slipping

Market Analysis /
Greg McKenna / 22 May 2018

The Aussie dollar is sharply higher this morning, buoyed by the truce in the trade war, what that implies positively about growth in the world's two biggest economies, and what that, in turn, means for commodity prices, and risk appetite. 

It's the perfect combination of positivity and the type of news which has at almost every juncture in my career seen the bid come in and the AUDUSD - not to mention AUDJPY - accelerate higher and outperform the other majors. 

Throw in a 4-month move which has seen the Aussie dollar fall from around 0.8135 to a recent low just above 74 cents and the time is ripe for a garden variety bounce in the AUDUSD toward the 38.2% retracement level of this years big fall. 

That would suggest AUDUSD could rally toward  0.7660. 

But given the outlook for the Australian economy, the slippage in the outlook for consumers and households, the mild uptick in unemployment and the dampening impact that will continue to have on wages - and thus feedback into consumers and households - and it seems this rally might be one to fade. 

Indeed, I put a presentation together for some clients yesterday as a monthly update on the Australian economy and it's outlook and I was struck by how solid things are but also how brittle on the consumer sector. 

Titled, Australia - is the economic glass half full or half empty, my conclusion was that for "only the second time in the last few years the glass might appear half empty, not full for the Australian economy. In some sectors of retail, it’s likely to feel like the well has run dry".

That was the takeaway after 8 slides which showed:

  • The Federal Budget in May was a positive for the economy – it delivered tax cuts within what consumers appear to have perceived as a positive fiscal backdrop;
  • That, the NAB business survey, Treasury and RBA forecasts of growth, and a still positive global growth outlook underly the positive outlook for the Australian economy;
  • But forecasts of wages growth in the Budget and by the RBA lack credibility. Thus the outlook for consumers and households – by the RBA’s own words – remains uncertain;
  • So much so, the RBA expressly said in the Minutes to the May meeting it needs to be a source of stability and confidence. To me, behaviourally, that fairly schemes real concern.

So, I agree with noted Australian economist Stephen Koukoulas who, writing for Yahoo Finance today, said "At one level, it is to be hoped the RBA is correct and the economy gains momentum, wages growth increase and eventually interest rates need to rise. That is because the economic news would be universally good. The recent facts suggest this is a long shot".

Indeed they do. 

And that means the bond spread will continue to work against the AUssie dollr. That means the economic surprise index and the raw data, could work against the Aussie dollar. And when I throw in the overall outlook for the USD - which turns structurally more positive each day as Europe, the UK, and Japan struggle, will also add weight on the Aussie dollar. 

Which is where I get back to the headline of this note today. The bulls can enjoy this Aussie dollar rally while it lasts. But in the end it may prove ephemeral. 

To the charts then. 

On the day next resistance is at 0.7609/12 (50% of the fall from 78cents) and then 0.7660 which is the 61.8% of the last leg lower. Where sentiment and commodity prices go so will the Aussie at the moment.

Sellers are likely to be lurking overhead though. Support sits at 0.7560 on the day then 0.7535.

Here's the chart showing the upper extension of the current down trend. 

Click on me, I'll expand
Click on me, I'll expand

   

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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