Retail Sales (MoM) (APR) (01:30 GMT)
Expected: 0.5%
Previous: 1.1%

Construction Work (1Q) (01:30 GMT)
Expected: 1.2%
Previous: 4.3%

How Will The Markets React?

Economists expect Australian retail sales growth cooled slightly last month, though the 0.5 percent consensus sets up an eleventh consecutive monthly increase. Consumer spending has been on a consistently positive path and its strength has had a very clear effect on the overall economy. In the first quarter of the year, growth measured a year-high 1.0 percent – 0.7 percentage points of which was directly linked to domestic consumption. Given the available peripheral data for the same period, expectations of yet another increase in sales is well supported. The single most important contributor to liberal spending – labor trends – was still a prominent dynamic in April. According to the national statistics bureau’s numbers, employers added an additional 49,600 employees to the national payrolls over the period. For the past twelve months, this totals an impressive 300,000-plus new jobs in Australia for a new 18 year record. Further boosting Australian’s confidence in their current and future financial positions, the jobless rate slipped to a new 33 year low 4.4 percent over the same period. Outside of employment’s contribution to spending, there is likely to be a strong level of support from recent policy announcements. The government has recently announced a $2.1 billion tax relief package that will be spread out over the next four years. And to ensure that it the great majority of it will be funneled into the discretionary spending that contributes to consumption numbers, the RBA’s quarterly policy statement has given reason to believe the central bank has capped further rate hikes. In the lengthy report, central bankers said inflation is ‘benign’ and would allow plenty of time for Governor Glenn Stevens to respond should the tides change. Given all the strong support data surrounding the forthcoming release, the market’s unofficial outlook may be considerable higher than economists are letting on. Consequently, a disappointment could produce outsized declines.

Bonds – 10-Year Australian Government Bonds

Yields on the 10-year Australian government bond have been tripped up little on their long-term advance. From the swing low in February, rates have rallied over 400 basis points. More recently, the uptrend was taken through the 5.810 to 6.043 leg which was charged through historically strong employment numbers that have rallied expectations for spending and with in turn rate hikes. With April’s retail sales release, yet another positive month for spending would certainly add to expectations for a return to hawkish rhetoric for the RBA. This indicator is among the very last top-tier reports slated for release before the GDP and the RBA rate decision cross the wires next week. As it stands, economists aren’t banking on a rate hike anytime soon, though the market is considering it.

FX – AUD/USD

With support lying just below at 0.8170, AUDUSD has hovered near the 0.8200 level for the past few days, especially as economic data from Australia has been thin. The release of Retail Sales from the country could turn the tide for the pair, however, as the figure is anticipated to rise for the eleventh consecutive month. With continued improvements in the labor market fueling consumption, traders may consider the possibility that the Reserve Bank of Australia will become concerned that rapid domestic demand growth will drive up inflationary pressures, and subsequently lead to a rate hike this year. However, CPI has thus far remained cool, indicating that expansion will go on unfettered as the central bank will leave rates relatively accommodative. As a result, a strong Retail Sales release may only have a brief positive impact on AUDUSD, leading it up towards resistance at 0.8250. On the other hand, a disappointing release – particularly one that shows outright contraction – could bring the pair to drop like a stone towards 0.8109.

Equities – S&P/ASX 200 Index

The Australian S&P/ASX 200 benchmark index gained 1.1 percent to close at 6,317.60, ending three days of declines as a rally in metals, such as copper, led miners higher. BHP Billiton, the world's biggest mining company, rose 1.8 percent to A$31.70 while Rio Tinto, the third-largest, ended the day up 2.4 percent to a record A$96.36. Meanwhile, Coles, the nation's second-biggest retailer, slid 4.2 percent to A$16.65 after US buyout firm Kohlberg Kravis Roberts & Co. quit a buyout group considering making an offer for Coles, a day after CVC Asia Pacific Ltd. decided to walk away. Retailers like Coles could find a bid tone, however, as Australian Retail Sales are anticipated to improve once again in the month of August. However, this data would also signal that consumption has yet to cool and may lead the Reserve Bank of Australia to consider raising rates, which would be bearish for Australian equities as a whole. Nevertheless, with inflation remaining tame and a rock solid labor market fueling consumption, it is more likely that an encouraging retail sales report will lead the S&P/ASX 200 up towards 6,350.00.

John Kicklighter is a Currency Strategist at FXCM.