Aussie dollar slides below .78 cents

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Former RBA board member John Edwards picked a bad day to say that the central bank might raise rates even with low inflation. Coming just hours before the awful print of -0.6% for Australia’s August ​​retail sales, Edwards missed the important focus the RBA under governor Phil Lowe has had on households, their debt and spending.

The Aussie dollar came under heavy selling in the immediate aftermath of that retail sales release and has traded down to an overnight low around 0.7786 which marks a full round trip to the October lows.

The Australian dollar is sliding and that move doesn’t look done yet. A bounce before the US non-farm payrolls is possible and then it’s up to the data.

At the moment the Aussie is sitting just off that low at 0.7794 still pressured by a stronger US dollar and a recalibration of expectations for an RBA rate hike in 2018 and the associated concerns about the outlook for household consumption and spending that has driven that recalibration.

As I highlighted earlier, sales data was a disaster. The fall of 0.6% in aggregate sales and the sub-component break down really does give strength to the argument that Australian households are maxed out. Of particular note to me was the 1.3% fall in the cafe, restaurant, and takeaway sector. That’s as discretionary as spending comes and I’ve always used that as an indicator of household health and happiness. So, to that extent, this will need to be watched.

And it highlights the discussion we had yesterday about why the RBA is on hold at the moment.

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There is a real risk that rising rates, or just the prospect of rising rates, drives households into their caves and reduces spending. Indeed, that café, restaurant, and takeaway sub-sector of the retail sales report is what I call my “caving index”.

Other sectors were of course down. But I concentrate on this one because it is purely discretionary and we are starting to see the kind of month to month volatility which speaks to a behavioural change back to save and spend, save and spend. If sustained that tells us much about the outlook for the household sector and the domestic economy.

It suggests the pessimists might be right.

But, I’m not going to get too hand-wringy about the Australian economy just yet. I need to see what the NAB business survey shows and where employment growth prints.

But yesterday’s data really does highlight that household retrenchment is the big risk to the Australian economy as we make this next difficult transition away from the building construction boom.

In other forex news, the US dollar is on the cusp of a break higher with the DXY at 93.94 (+0.53%) and the Euro at 1.1704 (-0.47%). It sets up a tantalising release tonight of US non-farm payrolls and the associated hourly earnings and unemployment data. The market is looking for just 90,000 new jobs.

Naturally, the Euro’s weakness was also driven by the lower for longer ECB message that the minutes conveyed. Technically my money is on a test to 1.1525 which is just an easy garden variety 38.2% retracement of the recent run higher.

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Sterling was rocked by rumours that British prime minister Theresa May would be resigning. These were denied but the damage was done as traders again focus on the troubles of Brexit and the uncertainty about what exactly it will mean. GBP has broken back under the Brexit downtrend line and there is multiple time frame support at 1.3095 which has to hold. A break would signal a move toward 1.29, perhaps lower.

USDJPY is intriguing. As I posted yesterday on the blog there is a clear trade either way as it looks toppy but is still finding support on falls – like last night. A break of either 113.25 or 112.30 is likely to ignite the next big move.

ON the commodity bloc it’s carnage across the board. The Australian dollar is the worst of the three with a loss of 0.9% at 0.7791 this morning.

The Kiwi and CAD have lost 0.70/75% each and are trading at 1.2566 and 7114 respectively. Both have broken big levels and I’m now looking for significant moves technically. A move under 70 cents for the Kiwi and above 1.27 for the CAD.

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