Westpac Consumer Confidence showed the first slip in 6 months amidst concerns of stability of Europe’s financial system in the aftermath of Cyprus. Despite the decline, the Consumer Index continue to maintain above 100.0 – par level for optimistic sentiments. According to Bill Evans – Westpac’s Chief Economist, Westpac is forecasting Australian economic growth to be around 2.5% for 2013 and 2014, below potential of around 3.25%.
Overall, Australia’s outlook according to respondents has mellowed significantly. All 5 sub-index of the headline Confidence Index has fallen, with “outlook for economic conditions over next 5 year” falling the heaviest at -8.3%. Consumer spending is expected to fall with ‘time to buy a major household item’ index falling by 7.6%. Comparing to Nov 2011, the first time RBA cut rates in recent years, the index is merely 1.5% stronger, while staying 0.6% higher than 1 year ago. It seems that the effect of rate cuts may be drying up, opposite to what RBA has asserted in the past few statements, opening the door for future rate cuts in the future. Evans agree with a possibility of rate cut by RBA in 2013, but the likelihood of it happening in May is low. With inflation under control, Evans believe that there is a need for RBA to ease further to jolt start the economy once again.
Hence it is no surprise that AUD/USD traded lower, pulling price away from the 1.05 resistance. However, price managed to bounce off 1.048 support and break 1.05 in one swift motion. With that, the short-term bear cycle as indicated by Stochastic appears to be over, with Stoch line u-turning to cut the Signal line, forming an interim trough.
1.048 did not do this on its on though, but instead had assistance in the form of Chinese Trade Balance data. Exports from China grew 10.0% vs expected 11.7%, and sharply lower from Feb’s growth of 21.8%. This would generally mean worsening Chinese economic outlook, and should be bearish AUD/USD. However, it seems that traders were focusing more on the increasing Imports into China, which grew 14.1% vs expectation of 6.0%, and a full 180° turn from Feb’s -15.2%. This suggest that Chinese domestic demand remains strong, which is good for heavy exporters to China such as Australia and New Zealand. As a result, price jumped higher on the hope that Australia exports will continue to grow from here.
This interpretation of data is short-sighted, as decreasing exports out of China will eventually result in long-term economic downturn and impair domestic consumption growth. However, right now the market is bullish and the break of 1.05 resistance will spur buyers towards the 1.06 2013 high. Where can price go further then? Fundamentally, China and Australia economy cannot be described as robust, and possibility of RBA rate cut may increase towards the end of 2013. With global economy looking weaker with data from US being less than promising (see latest ISM Manufacturing and NFP), the strong fundamentals needed to push a high beta asset such as AUD/USD may not be available anytime soon. This would mean a push towards 1.06 and even beyond will only be able to rely on sentiments from Technical studies. This is not saying that price will never be able to reach there, as irrationality in markets has been widely documented throughout history, but rather traders should simply be aware of the potential fundamental pitfalls AUD/USD may face even as we continue the bullish trend from early March.
Sentiment is certainly bullish as evident from the support post Westpac Consumer Index, but is it sustainable?
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.