Summary:

  • AUD tumbles overnight as RBA’s Harper doesn’t rule out a rate cut
  • Australian construction PMI slides in September adding pressure on AUD
  • GBP takes a hit following a shambolic PM May speech

The Australian dollar hasn’t had a successful week as of yet, as it’s gotten a triple whammy from the Reserve Bank of Australia as well as the macroeconomic data. First, the RBA outlined a little more dovish outlook for is monetary policy. Second, the retail sales report caught investors off-guard as it vastly missed the consensus. Finally, RBA’s member Harper suggested overnight that another rate cut could be on the cards given lackluster wage growth which translated into slow growth in household income.

The last phrase is exactly the same we mentioned yesterday when we analyzed the retail sales report. The mechanism is simple, if wage growth is sluggish, it drags down retail sales which in turn weighs on household expenditure. That kind of a loop is unnerving the economy and could prompt policymakers to consider changing their course in monetary policy.

link do file download linkWage growth as well as retail sales in Australia remain exceptionally low taking into account the prior years. Source: Macrobond, XTB Research

Even though Harper underlined that a one-off decline in retail sales we registered in August wasn’t a cause for immediate alarm but a response through interest rates could be warranted if consumption across the economy lost momentum entirely. Notice, if retail sales goes limp further, it could significantly drag down consumption thereby GDP growth. Furthermore, we got a weaker construction PMI for September which came in at 54.7 compared to the prior release at 55.3.

link do file download linkThe AUDUSD has already neared its key support area where some corrective moves may take place. Given the latest streak of the soft data and RBA’s comments it seems that any upside could be contained, the NFP could be a game-changer though. Source: xStation5

Moving on, the pound has also gone off the boil lately following the PM May’s speech described by mass media as ’shambolic’. She was speaking at the Conservative Party conference in Manchester on Wednesday and while her speech was meant to re-energize her fractious leadership and build momentum for a domestic agenda, it resulted in a fiasco in the eyes of many observers. According to a former minister, she’s losing the confidence of her colleagues and should consider stepping down. Even as her resignation is unlikely as for now, it has already made the pound weaker which got a blow from soft indicators (PMIs) as well.