The Australian Dollar (AUD) continues to show resilience against the US Dollar (USD), driven by improved risk sentiment among investors. However, Australia’s retail sales figures have lagged behind expectations, presenting a mixed economic outlook for the country. As traders keep an eye on these developments, they also await the crucial PCE inflation report from the USA this Friday, which could further influence market dynamics.
AUD Strengthened by Improved Risk Appetite
The AUD has strengthened for the third consecutive session, bolstered by a general improvement in global risk appetite. Investor sentiment has turned more positive, favoring riskier assets like the Australian Dollar. This has helped the AUD gain ground against the USD despite some disappointing domestic economic data.
Retail Sales Growth Falls Short of Expectations
Australia’s retail sales grew by just 0.1% in April, falling short of the expected 0.2% increase and only slightly reversing the previous month’s 0.4% decline. According to the Australian Bureau of Statistics (ABS), cautious consumer behavior, driven by high borrowing costs and rising rents, has limited household spending. April’s retail turnover was A$35.7 billion ($23.78 billion), up a mere 1.3% from a year earlier. This sluggish growth is particularly notable given Australia’s population growth rate of over 2% per year.
| Metric | Value |
|---|---|
| April Retail Sales Growth | 0.1% |
| Expected Retail Sales Growth | 0.2% |
| Previous Month’s Retail Sales Decline | -0.4% |
| April Retail Turnover | A$35.7 billion ($23.78 billion) |
| Year-over-Year Retail Sales Growth | 1.3% |
| Australia’s Annual Population Growth | Over 2% |
| Factors Limiting Household Spending | High borrowing costs, rising rents |
According to the Australian Bureau of Statistics (ABS), cautious consumer behavior has resulted in limited household spending, contributing to the sluggish retail sales growth in April.
Since the start of 2024, trend retail turnover has been flat as cautious consumers reduce their discretionary spending. Looking across the past two months, we see weak underlying spending in most parts of the retail industry.
Decline in Per Capita Sales Volumes
Another concerning trend is the continuous decline in sales volumes per capita, which has fallen for seven straight quarters. This type of weakness is typically seen during recessions and is partly attributed to higher mortgage rates and rising rents that are eroding consumers’ spending power. Additionally, costs for services not covered by retail data, such as insurance, education, health, and electricity, have been rising much faster than goods prices.
Impact of RBA’s Monetary Policy
The Reserve Bank of Australia (RBA) has noted the challenge of predicting future changes in the cash rate, citing recent data that suggest inflation might stay above the 2-3% target for an extended period. The stubbornness of service inflation is a major reason the RBA is considered unlikely to lower borrowing costs this year. Market futures imply around a 30% chance of a quarter-point cut in the 4.35% cash rate by December, with an easing not fully priced in until May 2025.
US Dollar Weakens Amid Lower Treasury Yields
The depreciation of the USD has also played a role in the AUD’s recent strength. Lower US Treasury yields have made the USD less attractive, further supporting the AUD. This dynamic will be closely watched as traders await the upcoming PCE inflation report from the USA.
Awaiting the PCE Inflation Report
The market is keenly awaiting the all-important PCE inflation report from the USA, set to be released this Friday. This report will provide crucial insights into the inflationary pressures in the US economy, potentially influencing Federal Reserve policy decisions and, consequently, international currency markets.
As traders monitor these events, the interplay between Australia’s economic indicators and global risk sentiment will continue to shape the performance of the AUD in the days ahead.
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