Will Australian Retail Sales Keep AUD/USD Sub?0.8600?

[B]How Will The Markets React[/B]?
Australia faces a double dose of data ahead of the Reserve Bank of Australia’s monetary policy meeting on Tuesday, and any major deviations from expectations could send the country’s asset markets reeling. Retail sales growth is expected to have accelerated 0.7 percent in May, which would mark the 12th consecutive monthly increase as job gains and rising wages buoyed spending. Consumption has proven to be a major driver of the Australian economy, as GDP expanded 1.6 percent in the first quarter, and consumer spending alone contributed 0.9 percentage points to that rate. At the same time, building approvals are predicted to fall 1.4 percent in May as high interest rates and rising house prices restrain property investment. Given the mixed performances of different sectors, it was not surprising to hear RBA Governor Glenn Stevens comment that the central bank has “additional time” to respond to a pickup in economic growth, especially after consumer prices rose less than expected in the first quarter. With the RBA maintaining a decidedly neutral bias, there is almost no chance of a rate hike Tuesday evening. Thus, economic data in line with expectations on Monday evening will do little to convince traders that the central bank will take a more hawkish stance.
[B]Bonds - 10-Year Australian Government Bond Futures[/B]
For the past few weeks, 10-year Australian government bond futures have oscillated within an ascending channel with prices near resistance at 93.84 and yields hovering at 6.175 percent. Given the recent bout of risk aversion in the markets following various terrorist activities in London and Glasgow, the move higher in bonds is not entirely surprising. However, the concurrent release of Australian retail sales and building approvals may have only limited impact as they are anticipated to give mixed results. Should one of the figures actually surprise the markets and the data gives a resoundingly bearish or bullish impression, price action may see a decent spike in volatility. With resistance looming above, Australian bonds will be most responsive to the combination of a strong retail sales and building approvals report.

The Australian dollar has been barreling towards 18 year highs, with the daily AUD/USD candle looking highly bullish as price attempts to break the 0.8600 level. Though the sharp ascent has been due mainly to overt weakness in the US dollar, it is worth noting the AUD/USD increase ahead of the Reserve Bank of Australia?s meeting on Tuesday evening. Furthermore, we have market-moving economic data on tap on Monday evening, which could help sway market expectations for the RBA. Retail sales and building approvals will be released at the same time on Monday, but the reports are anticipated to give mixed signals. Traders will likely react more rapidly to the retail sales report, as sharp spending gains could spark inflation concerns and give AUD/USD a temporary boost. However, given the formidable resistance that 0.8600 provides, Aussie may be stopped short, especially as no action is expected form the RBA this week. On the other hand, the combination of soft retail sales and declining building approvals may have a greater impact on the currency as markets look for any reason to fade the rally down to trendline support.

[B]Equities - ASX 200 Index[/B]
Australian stocks started out the week down following a foiled bomb plot in London on Friday and an attack on a Scotland airport during the weekend. Meanwhile, banking shares paced declines as their US peers dropped on concerns that losses on mortgages will deepen as the US housing market worsens. The S&P/ASX 200 slipped 0.2 percent to 6,263.30 as of the close in Sydney with St George, Australia’s fifth biggest lender, down 0.8 percent to A$35.15 while National Australia Bank, the nation’s biggest, eased 1 percent to A$40.60. On the other hand, AED Oil Ltd. (AED AU), a Melbourne-based oil developer, added a whopping 14 percent to end the day at A$8.64 after the company doubled its estimate of how much oil is in its Timor Sea reserves to 100 million barrels.
The S&P/ASX has held within a channel over the past month, as equity markets around the globe have been hesitant to break multi-year highs. Trapped in the middle of this range, Australian economic data could help give the index direction on Monday evening. Retail sales are anticipated to jump during the month of May, which would bode well for retailers and could help improve market sentiment as growth maintains pace. However, building approvals for the same period are anticipated to counter the retail report, as the housing sector figure is forecasted to drop. As a result, the S&P/ASX isn?t likely to veer far from its close just below 6,300, but sharp gains or declines in both figures could take the Australian benchmark index with them.