Australian Retail Sales (NOV) (00:30 GMT; 19:30 EST)
Expected: 0.5%
Previous: 0.2%

What Are The Markets Facing?

Australian retail sales are expected to improve during the month of November at a rate of 0.5 percent amidst a hiring boom. Indeed, employment conditions have been extremely favorable as the labor market has taken on additional workers for 13 consecutive months. While the unemployment rate has actually risen to 4.5 percent from a low of 4.2 percent, this is primarily the result of a surge in the participation rate as Australians come back into the market looking for positions. Meanwhile, a lack of availability of skilled workers at mining companies creates the potential for faster wage growth, which the Reserve Bank of Australia will see as a threat to price stability. With CPI expected to rise above 3.0 percent during the first half of 2008, it’s no wonder the central bank holds such a hawkish bias. In fact, in the policy statement from the RBA’s December meeting, Governor Glenn Stevens noted that “recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity.” While the Board remained “concerned about the outlook for inflation,” increased “uncertainty about the international outlook and the local trends in wholesale borrowing costs” left the RBA to judge that “the current stance of monetary policy should be maintained for the time being.” Though the global outlook for growth remains uncertain, credit conditions have improved which may leave the RBA more comfortable considering rate hikes. Furthermore, while the bank does not meet again until February 5 and data released before that time may indicate changing conditions, a surprisingly strong release will lead the markets to aggressively ramp up expectations of further monetary policy tightening at that meeting.

Bonds – 10-Year Australian Government Bond Futures

Australian government bonds have found support near the 93.89 level, but they could be in for additional decline if retail sales prove to be stronger than expected. Indeed, with the RBA already concerned about building inflation pressures, signs that consumption growth is accelerating will lead traders to ramp up speculation that the bank will raise rates in February. On the other hand, if Australian equity markets continue to tumble, the subsequent risk aversion could lift AGBs up towards 94.00.

FX – AUD/USD

As a commodity currency, it has been interesting to see that the rapid ascent of gold prices has had little impact on the Australian dollar. Nevertheless, AUD/USD appears to be picking up pace to target Fibonacci resistance at 0.8900, and the pair could possibly breach 0.9400 to rally to parity with the US Dollar. Looking at upcoming event risk, the release of Australian retail sales could trigger gains for AUD/USD as the figure is expected to improve, and with labor markets remaining so resilient, there is potential for a stronger-than-expected reading. If this is the case, the markets may ramp up speculation that the RBA will move to hike rates in February while most other central banks are reducing interest rates or at least considering cutting rates.

Equities – S&P/ASX 200 Index

The S&P/ASX 200 has tumbled quite a bit since running into resistance at the confluence of the 38.2 percent fib of 5,483.30 – 6,851.50 and the 200 SMA at 6,328/30. Furthermore, the index has broken below support at the 50 percent fib level at 6,167.40, suggesting price may have even further to fall. The release of Australian retail sales could give equities a bit of a short-term boost, but with risk aversion remaining one of the primary drivers of stock and fixed income market price action, the overwhelming trend (down) may hold. The next level of support looms at 6,000, which also happens to be a psychologically important level and should prevent further declines in the near-term.

Terri Belkas is a Currency Strategist at FXCM.