The Australian dollar's recovery is about to be put to the test

Sean Gallup/Getty
  • The Australian dollar meandered its way through Monday’s trading session without really going anywhere.
  • Australian economic data released during the session was weak — building approvals tanked in December and annual growth in job ads turned negative for the fist time in nearly four years.
  • Tuesday will be a key day for the Australian economy and outlook for domestic interest rates. Markets will receive retail sales and trade data for December and the RBA will announce its February interest rate decision.
  • Services PMI reports will dominate the data headlines in the second half of the session.

The Australian dollar is trading mixed against the crosses in late trade on Monday.

Here’s the scoreboard at 7.30am in Sydney on Tuesday.

AUD/USD 0.7223 , -0.0026 , -0.36%
AUD/JPY 79.38 , 0.09 , 0.11%
AUD/CNH 4.8956 , 0.0029 , 0.06%
AUD/EUR 0.6314 , -0.0008 , -0.13%
AUD/GBP 0.5536 , 0.0003 , 0.05%
AUD/NZD 1.0489 , 0.001 , 0.10%
AUD/CAD 0.948 , -0.0015 , -0.16%

The main them of Monday’s session was broad based US dollar strength, helped by a lift in US bond yields despite another weak reading on US factory orders in November.

“AUD/USD eased modestly in line with the stronger USD,” said Joseph Capurso, Senior Currency Strategist at the Commonwealth Bank.

“With the increase in US yields in recent days, the Australia US two-year bond spread eased back down to 74 basis points (bps). While the bond spread is not as low as 91bps reached in November, it will bear down on AUD.”

While the greenback’s strength weighed on the Aussie, it put in a better performance against the crosses, rising modestly against the offshore traded yuan, British pound and New Zealand dollar.

The gains in the Aussie came despite another plunge in Australian building approvals in December and news that Australian job advertisements turned negative in year-ended terms for the first time since mid-2015 in January.

While it attracted plenty of headlines and analysis, there was little reaction to the release of the final report into Australia’s banking royal commission, suggesting that traders don’t believe it will have a meaningful impact on the broader Australian economy beyond what’s already been seen.

Investing.comAUD/USD Hourly Chart

Turning to the day ahead, it will be a crucial session for the Australian economy along with the outlook for domestic interest rates. There’s a stack of major Australian data releases on the way ahead of the release of the Reserve Bank of Australia’s February interest rate decision.

All the action kicks off at 8.30am AEDT when the Ai Group releases it’s Performance of Services Indicator (PSI) for January, providing a snapshot on how the largest and most important business sector in Australia was faring in early 2019.

Following that release, markets will receive two major reports at 11.30am AEDT that will have ramifications for Q4 GDP.

Retail sales and international trade data for December will both hit at the same time, with the former likely to garner most attention given heightened concerns about the prospect for a housing-led slowdown in household spending.

Retail turnover is expected to come in flat, although, based on other alternate measures of retail spending in December, the risks appear to be slanted to the downside. The report will also contain quarterly retail sales volumes that will feed directly into Australian Q4 GDP. Inflation-adjusted turnover is expected to increase by 0.5%.

This 10-second guide has more on what to expect.

For the trade report, the trade surplus is tipped to swell to $2.225 billion, up from $1.925 billion in November. The report will also provide a rough guide as to the contribution from trade for Australia’s GDP report.

After the data deluge, the Reserve Bank of Australia (RBA) will take centre stage with the release of its first interest rate decision of the year. While the cash rate is widely expected to remain unchanged at 1.5%, the tone and contents of the accompanying monetary policy statement could be quite different to that seen just two months ago.

“RBA pricing has moved away from a mild tightening bias to an easing bias, the market yesterday factoring in just over a 50% chance that the Bank would ease by the end of this year,” said David de Garis, Economist at the National Australia Bank.

“That’s an about face from the expectation last year that there was an equivalent chance that the cash rate would rise.”

This 10-second guide explains what changes may be seen when the statement is released at 2.30pm AEDT.

Outside of Australia, the regional calendar is fairly quiet with services PMIs from Japan and India the headline acts. Chinese markets will remain closed for Lunar New Year celebrations.

Later in the session, the services PMI deluge continues with figures from the Eurozone, UK and United States. Canadian trade data for December will also be released.

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