By Orbex

Overnight we will get the last bit of market-moving data ahead of the RBA interest rate decision next week. Since the central bank holding steady is not a foregone conclusion in this environment, traders will be looking closely to see how consumer demand has been affected by recent policy changes.

June Retail Sales are the first of this data set to have the effect of the RBA’s rate cuts. And, if the plan is working, we should see some improvement.

Otherwise, further action from the central bank might be on the cards, which will likely weaken the Aussie. But, if there is an improvement, we might be able to cover over some of the effect caused by recent news that China was getting concerned over the price of iron ore.

What We Are Looking For

This time around we get monthly and quarterly retail sales figures. However, the market is probably going to mainly focus on the former. Without any other major data expected overnight, this is likely the point we could expect the most volatility from Australia until next week.

Expectations are for monthly retail sales to modestly grow at 0.2%. This would be up from 0.1% posted in May. For reference, a “normal” range for retail sales is between 0% and 0.5% monthly. So, if we were to get a result outside of that, we’d expect a larger market reaction. Let’s not forget that we recently saw Australia post the largest trade surplus on record. This was aided in part by a drop in imports signaling that retail sales are likely to be depressed.

Projections indicate that quarterly retail sales could pick up the pace to 0.5%. This would be an increase from a -0.1% contraction in the first quarter. January’s results significantly impacted the prior quarter economic sentiment, following press speculation of a housing crash and recession during December. An improvement over the prior quarter would be a matter of course in this scenario.

The Details

Almost as important as the headline number are the components of the data that provide some insight into the trends. Over the last few months, spending on household goods and clothing have been the worst performers. This indicates that Australians are trimming back on less essential goods. Meanwhile, spending on food has continued to increase at the same pace.

Non-food spending, however, has been negative several times so far this year. This is considered to be a better gauge of discretionary spending. Should the RBA’s actions be helping prop up consumer demand, we ought to see an improvement in this figure.

Prices Aren’t Cooperating

Inflation stagnated in the first quarter. And, for the moment, projections of an increase are based on the expectation that the RBA’s action will have an effect. However, consumer prices are largely determined by discretionary spending.

Therefore, if that part of retail sales doesn’t improve significantly over the next couple of reports, we could see further weakness in the Aussie dollar as traders consider more central bank action.

Furthermore, unemployment hasn’t managed to return back to 5.0%. Reports now state that it is at its highest in a year, mostly because it’s largely stagnant. Without increasing wage pressures, it would be harder to expect increasing consumer demand in the near term.

By Orbex