Aussie Higher after Retail Sales, Dollar Down But Not Out

Aussie trades broadly higher in Asian session as lifted by retail sales data. While AUD/UD is still limited below 0.7896 key near term resistance, EUR/AUD has dipped through 1.5226 support, which signals more Aussie strength ahead. Over the week, Yen remains the strongest one on speculations of BoJ stimulus exit. Dollar suffered steep selling of talks that China will slow purchases of US assets. But still, the greenback in trading mixed, in red against Yen Aussie and Kiwi only.

Australia retail sales grew 1.2% in November

Australian Dollar is lifted by stronger than expected retail sales data today. Retail sales grew 1.2% mom in November, triple of expectation of 0.4% mom. There are talks that RBA could finally join some other global central banks in tightening this year. And RBA could raise the official cash rate by 25bps in August. However, the key would possibly lie in wage growth, which has been sluggish in spite of healthy job market growth. Also, recent cooling of housing markets also lessen the pressure on RBA to hike. These will be the two key factors to watch ahead.

Chicago Fed Evans prefer pause in rate hike

Chicago Fed President Charles Evans said he’d prefer a pause in tightening and wait until mid-2018 before raising interest rate again. He said that "I’d feel a lot more confident if I saw those transitory reductions in the inflation rate go away." And, "if in fact things are worked out we could resume a nice gradual pace (of rate hikes) at that point, and still get the funds rate up to its natural level before too long." 

St Louis Fed President James Bullard joined the debate on so far price level targeting. Bullard said Fed’s inability to meet inflation target in the past five years resulted in a 4.6% gap in the economy. And that amounts to more than USD 820b in the USD 18T economy. And to compensate for that, Fed would have to allow inflation to hit 2.5% for a decade.

Trump may announce Nafta withdrawal

Reuters reported that Canadian government is increasing convinced that US President Donald Trump will announce withdraw from Nafta, giving six month notice. Officials declined to comment on the rumor. The next talk between the US, Canada and Mexico will start on January 23 in Quebec, Canada. There are talks that officials are already scheduling to meet again in Mexico the next month, but there is no formal announcement yet. Canadian Dollar is mildly lower after the news.

Meanwhile, the President of US Chamber of Commerce Thomas J. Donohue warned that withdrawing from Nafta would be a "grave mistake". He said that "the American economy has taken several big steps forward with regulatory relief and tax reform, and the administration deserves lots of credit. But a wrong move on NAFTA would send us five steps back." He supported the modernization of the 24 year old trade agreement. But he emphasized that the trade agreement "should not close markets, undermine investment protections, or limit trade with regulatory red tape." And, "the bottom line is that growth will be weakened, not strengthened or sustained, if we pull back from trade."

Looking ahead

ECB monetary policy meeting accounts will be a key focus today. Eurozone will also release industrial production. Canada will release new housing price index. US will release PPI and jobless claims.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7811; (P) 0.7838; (R1) 0.7869; More…

AUD/USD’s rally resumed after drawing support from 4 hour 55 EMA. Outlook is unchanged. Considering bearish divergence condition in 4 hour MACD, upside should be limited by 0.7896 cluster resistance (61.8% retracement of 0.8124 to 0.7500 at 0.7886) resistance zone to bring short term topping. Break of 0.7804 minor support will turn bias to the downside for 55 day EMA (now at 0.7725). However, sustained break of 0.7886/96 will pave the way for retesting 0.8124 high.

In the bigger picture, we’re still slightly favoring the case that corrective rise from 0.6826 medium term bottom is completed at 0.8124, after hitting 55 month EMA (now at 0.8032). But stronger than expected rebound from 0.7500 is dampening this bearish view. On the downside, break of 0.7500 will target 0.7328 key cluster support (61.8% retracement 0.6826 to 0.8124 at 0.7322) to confirm this bearish case. But break of 0.8124 will extend the rise from 0.6826 to 38.2% retracement of 1.1079 (2011 high) to 0.6826 (2016 low) at 0.8451 before completion.

Economic Indicators Update