Australian Dollar, Equity Breakouts Need Retail Sales For Follow Through

Australian Retail Sales (APR) (01:30 GMT)
Australian Retail Sales (QoQ) (1Q) (01:30 GMT)
Expected: 0.5%
Expected: 1.7%
Previous: 0.9%
Previous: 1.3%

How Will The Markets React?
The Australian financial markets have had a busy week. The fundamental-drive began early with the TD inflation numbers building pressure into a mid-week RBA rate decision. Foreshadowing the eventual pass, the proprietary price indicator eased its annual gait from a haughty 3.5 percent to a more reasonable 3.0 percent. While any rate decision always has inherent risk, the ultimate pass was all but overlooked by the market since there was no official statement from policy officials to back up the decision or more importantly give an outlook. However, traders didn?t go without an official outlook on monetary policy for long. The economic calendar officially ended with the Reserve Bank of Australia?s Quarterly Monetary Policy Statement. While the lengthy report clearly sported an optimistic outlook for growth and the economy, inflation projections received a notable downgrade. Traders jumped on the RBA?s revision for consumer price index expectations from 2.75 percent to 2.50 percent - well within the central bank?s tolerance band. What?s more the group made a more interesting forecast for year-over-year CPI to eventually “fall below 2.0 [percent] over the next couple of quarters.” For traders, this clearly translated to a hold on interest rates at least for a few quarters; and participants in the S&P/ASX 200 and the Australian dollar used the sound speculation to force breakouts - higher for equities, lower for the currency. Now that the push has been made and significant technical levels have been breached, traders from both sides of the markets will look to see whether fundamentals can keep the breaks going. On Monday evening, the docket will have its first crack at the move with retail sales. March sales growth is expected to cool, though the quarterly number is projected to accelerate. Unlike the policy statement, should the indicator disappoint, it could drive both the equities and the currency lower - cutting the ASX?s breakout and stoking the AUDUSD drop.
Bonds -10-Year Australian Government Bonds
Australian government bonds, unlike the Australian currency and benchmark equities index, didn?t breach any major technical levels on the cooled inflation rhetoric from the quarterly policy statement. When the RBA signaled to the market that they would pause on further rate hikes for the near-term, the yield on the 10-year bond in fact rose modestly. This small rise now puts price action at odds with a downward slopping trend that will eventually meet 5.810 support and require a decision on direction. Next week?s March retail sales report will make the opening mark. Should sales accelerate as the quarterly number suggests, the downtrend may quickly turn into a move towards 5.985. However, if sales slow and domestic demand dims, 5.810 could come under pressure.

The AUDUSD has broken through multiple levels of support, most recently the April lows near .8235. Though price has managed to hold above .8200, it appears that the highs above .8390 may signal a top for the pair, and the release of Australian retail sales could take AUDUSD even lower. The monthly figure is anticipated to slow to 0.5 percent, pointing to weaker consumption trends. However, the quarterly retail sales report (ex. Inflation) is actually predicted to gain 1.7 percent, boding particularly well for first quarter GDP. It is worth considering, though, the potential impact of the Reserve Bank of Australia?s aggressive policy action in 2006, which is likely starting to take its full toll and may send the quarterly spending report down as well. Nevertheless, .8200 remains a major support level, and a bout of weak economic data could send AUDUSD for a sustained break lower.

Equities - S&P/ASX 200 Index
Australian stocks extended their record, led by mining companies after metals prices rose and better-than-expected reports on US services industries and productivity eased concern the world’s largest economy is slowing. Stocks also got a boost after Australia’s central bank cut its 2007 forecast for inflation, signaling it may not have to raise interest rates this year. The S&P/ASX 200 Index climbed 1 percent to 6304.90 at the close in Sydney, marking a weekly gain of 2.5 percent. BHP, the world’s biggest mining company, rose 2.4 percent to A$30.60 while Rio Tinto Group jumped 4.6 percent to A$86.85.
The next Sydney market open could be mixed following a strong session in US equity markets on Friday, a decline in retail sales during the month of April could lead shares in the S&P/ASX 200 Index lower. The index recently broke through a tight range, but given its lofty levels, equities could be due for a retracement and cooling consumption would only exacerbate such price action. A decline in spending would not be particularly surprising, however, as aggressive monetary policy action by the Reserve Bank of Australia in 2006 is likely starting to take its full toll.