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Is the party already over for the Australian dollar?

It has been a very eventful week in Australia and for the aussie. The RBA isn’t providing the market with much guidance on the direction of monetary policy, apart from saying it needs to remain accommodative, and domestic economic data is further blurring the outlook for interest rates. The ensuing volatility in the Australian dollar has resulted in some big moves in AUDUSD, with the pair briefly sampling life above 0.7800 before it began to slide; a sell-off sparked by profit taking and fuelled by softer than expected economic numbers.

Flat retail sales and a large drop in exports in April eroded some of the optimism that built-up on the back of Q1’s stronger than expected growth figures. The market was expecting retail sales to have increased 0.3% in April, but consumers clearly remained concerned about Australia’s uncertain economic outlook and aren’t inspired by recent cuts to the official cash rate. In saying that, there was a pick-up in confidence last month and this may encourage spending in near-term.

Also, exports fell 6% in April, casting further doubt about the health of Australia’s all-important export market which, as yesterday’s GDP numbers showed, is still the backbone of growth. Along with a 4% increase in imports, the drop in exports helped push Australia’s trade balance even deeper into deficit. At 3.89nm, it beat a 3.88bn deficit recorded in February 2008 to become the largest trade deficit since records began in 1971.

What’s the aussie doing against the G10?

The Australian dollar has performed well against most of the majors this week thanks to the RBA’s lack of an explicit easing bias and widespread US dollar weakness. AUDUSD and AUDJPY are still up around 1.6% and 1.35% respectively, despite today’s soft economic data. The aussie is also up against the loonie, kiwi, sterling and Swiss franc, while it has lost ground against most European currencies on encouraging European economic data and renewed optimism about the Grexit situation. Overall, we aren’t very bullish on the aussie in the near-tern and we suspect it may fall victim to continued profit taking on the back of today’s softer economic data, and it’s particularly vulnerable to potential USD strength if Friday’s NFP report beats expectations (expected 226K).



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