Australian Dollar Retreats on Disappointing Retail Sales, Lending Data (Euro Open)

The Australian Dollar fell sharply lower, losing its grip on the 0.86 level against the US Dollar after Retail Sales, Home Loans and Investment Lending figures disappointed, showing that fading fiscal stimulus and rising borrowing costs may be undermining Australia’s economic recovery.

Key Overnight Developments

• Australian Recovery Losing Steam as Retail Sales, Lending Tumble
• UK Consumer Confidence Rose to Highest in Over a Year, Says Nationwide

Critical Levels

The Euro tried to regain a foothold above the 1.45 level but failed to retain bullish momentum to end the overnight session effectively flat. The British Pound drifted a bit higher, adding 0.2% against the US Dollar ahead of the opening bell in London.

Asia Session Highlights

Australia’s Retail Sales unexpectedly fell -1.0% in July, disappointing economists’ forecasts for a gain of 0.5%. Department store sales led losses to slip -3.6%, the most in five months, while food and apparel sales fell -1.9% and -0.6% respectively. The report suggests the boost to spending from the government’s A$20 billion in cash handouts is beginning to dissipate, with retail activity likely to accelerate lower as unemployment continues higher. Indeed, a survey of economists conducted by Bloomberg forecasts the jobless rate, now at a six-year high of 5.8%, will rise to average 6.25% this year and 7.9% in 2010.

Rising borrowing costs may prove to be another hurdle for the nascent economic recovery: while the RBA has kept benchmark interest rates on hold at 3% since February, the cost of borrowing in Australian Dollars for six months or longer in the interbank market has gradually crept higher over recent months. This will act as a barrier to spending and investment, weighing on economic growth. Indeed, Investment Lending and Home Loans both fell in July, the former by the most since January and the latter for the first time in 10 months.

The Westpac Consumer Confidence index offered a bit of a counterbalance to an otherwise negative batch of Australian economic data, growing 5.2% in September to rise to the highest level in over 2 years. However, it is important to note that the Westpac metric bottomed about five months before the trough in economic growth in the fourth quarter of last year, suggesting sentiment is running well ahead of underlying economic conditions.

In the UK, Nationwide Consumer Confidence rose to the highest in over a year in August, printing at 63 versus a revised reading of 61 in the previous month. Details of the survey did yield some ominous signs however: the number of respondents expecting higher incomes and planning major purchases in the next six months both declined. On balance, the sentiment index has largely tracked the FTSE 100 index, with the two now showing a formidable 91.8% correlation. If consumers’ perception of the economy is driven by the stock ticker, their confidence may prove fleeting if shares were to correct downward. For our part, we’ve argued for some time now that equities have done too much, too fast in recent months: global issues finished August trading at levels unseen since 2003 relative to earnings; the world economy grew nearly 3% in real terms that year, whereas virtually every credible forecast calls for the first post-WWII contraction in real GDP growth in 2009, pointing to lackluster revenues and overvalued equities.

Euro Session: What to Expect

The final revision of Germany’s EU-harmonized Consumer Price Index is set to confirm that the annual pace of inflation held flat in August after slipping -0.7% in the previous month. Still, the threat of deflation remains viable for the Euro Zone’s largest economy: a survey of economists polled by Bloomberg suggests CPI will continue shrinking through the third quarter and return positive growth by the end of the year; this may prove to be too rosy considering the role of fiscal stimulus and the inventory cycle in engineering the latest upswing in economic growth as well as the European Central Bank’s apparent inability to offer effective monetary easing. Indeed, the big question for Germany as well as most anywhere at this stage being whether growth will continue after the flow of government cash dries up. Prices could easily slip back into negative territory if output begins to flounder once again, helped lower by a general slowdown in the pace of economic activity as well as downward pressure on input prices (especially that of oil) that is likely to come if recent stabilization is revealed to be little more than a temporary reprieve in a larger down trend.

Turning to the UK, the Trade Balance deficit is expected to narrow to -2.0 billion pounds in July from -2.18 billion in the preceding month. Traders will be watching to see if the headline improvement comes courtesy of a drop in imports, thereby reflecting continued weakness in domestic spending, or a pickup in exports. However, as we noted yesterday when discussing July’s Industrial Production figures, rising overseas sales would like owe most of their gains to global fiscal stimulus efforts and the inventory cycle. Going forward, it remains to be seen if the rebound will continue absent a meaningful recovery in private demand as countries unwind expansionary policies and restocking is completed.

Written by Ilya Spivak, Currency Analyst
Article Source – Australian Dollar Retreats on Disappointing Retail Sales, Lending Data (Euro Open)