Retail sales for May weren't terrible yesterday. Indeed they beat expectations with a 0.4% print and together with an increase in the April number (0.5%) showed sales growing at a healthy clip in the first 2 months of Q2.
But a slightly deeper dive into the data suggested that weather played an outsized part in the strength. As always, the devil is in the detail and for me that devil was the 1% fall in cafes, takeaway, and restaurant spending. This is pure discretionary. So, I’m not going to poo poo the number outright. But I am going to say the internals give me pause to remain concerned about households.
The wash up is it doesn't change the outlook for the RBA which is likely to remain on hold for an extended period still.
That's important because as the Pound, Loonie, and Euro reacted to changed, changing, and moving perceptions of central bank policy the Aussie has no such driver. That, in turn, means it's the US dollar, the funk in Chinese stocks, the global trade war, perceptions of its impact on global growth, and then all the aboves impact on commodity prices and risk appetite.
That's a tightly woven bunch of interconnections. One that could be unraveled very quickly from negative to positive if the US Administration decides to back down and be more conciliatory. But the chances of that remain remote right now.
So unless the USD is about to fall out of bed the Aussie remains under pressure.
What's worth noting - something I've written often in recent months - is that markets, traders, and investors have underestimated the resolve of the US Administration to pursue President Trumps MAGA - Make America Great Again - mantra.
It's in the DNA of this Administration. So as the deadline for the first round of tariffs on Chinese goods to actually be put in place on July 6 draws near there has been a subtle but distinct shift in the number of voices who are now saying this could all end up in a big global mess with a huge hit to global growth.
Again, unless the USD falls out of bed this is not a positive move nor a positive backdrop for the Australian dollar.
So I retain a downside bias for AUDUSD.
Shorter term and closer to hand, at 0.7380 the Aussie has outperformed what I might usually look for given that backdrop. Indeed as I highlight often the very short term relationship with copper is an important one for me and on that front the 2% drop overnight suggests the AUDUSD is probably around half a cent above where it should be.
No doubt that’s because the USD has stopped rising against the majors which has in turn released some of the pressure on the Aussie dollar’s downward trajectory. Likewise, as I highlighted earlier this week the relationship with the USDCNY is also important. And the PBOC's interventions - verbal and physical - have stabilised the Yuan.
For now that is at least because Reuters reports this morning that, “China is comfortable with a weakening yuan, intervening only to prevent any rapid and destabilising declines or to restore market confidence, as the economy loses momentum and faces further risks from a heated trade dispute with the United States, policy insiders said”.
So the AUDUSD could end up with more downside pressure there even though for the moment the stability of the USDCNY rate has been a short term support.
So, on the day I'd argue as yesterday’s price action showed, sellers are still keen to hit the bid on any rallies.
On the day today levels I’m watching are 0.7370, 0.7335, 0.7310/15 and then of course 73 cents. Topside it’s 0.7397, 0.7424 and 0.7445/50.
Have a great day's trading.
Chief Market Strategist
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