Australian Retail Sales Sag, Will RBA Cut 50bp?

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Australian Retail Sales missed their mark badly printing at 0.0% versus 0.4% eyed prompting speculation that the RBA may cut rates by a more dramatic 50bp rather than 25bp priced in. Australian Retail sales were flat in November as consumer spending slowed to a crawl amidst signs of weaker labor markets. ANZ job advertisements, an early measure of labor demand, also weakened contracting by -2.9% in October.

Australia’s retail sector is the second largest in the country’s economy representing 10.5% of all activity and it has seen growth essentially flatline over the past 3 months. The news bodes poorly for overall growth in Q4 as slowdown in demand from China is clearly making its presence felt Down Under. Saturday’s HSBC China PMI reading which printed above 50 for the second month in a row, helped offset some of the concerns, but the growth in China is barely above the boom/bust line and is unlikely to help stimulate demand for Australia going forward.

The weak Retail data has spurred speculation that the RBA may opt for a larger 50bp cut at it next meeting this Wednesday. We think that’s unlikely, given the generally gradualist approach of the Australian monetary authorities. Furthermore, a bigger cut in the benchmark rate could only aggravate the overheated real estate market where the majority of mortgages are variable rate. However, the central bank has been consistent in its assessment that the Aussie remains overvalued and a 50bp cut would undoubtedly put downward pressure on the unit. The Australian dollar remains the key carry currency in the G-20 universe but if its benchmark rate is cut to 2.75% the spread between the AUD/USD and the rest of the block will have compressed significantly making it far less attractive going forward.

For now, the Aussie remains supported at the 1.0400 level and so far has survived two runs to the downside in Asian and early European trade. However the downward pressure on the unit persists and if risk aversion flows pick in North American session the pair could break lower targeting 1.0350 ahead of the RBA decision.

Boris Schlossberg
Managing Director

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