Private sector credit expanded by 0.3% MoM which is the lower boundary of the longer-term trend (0.3% is -1 standard deviation from the entire data set, to exhibit weakness of borrowing). In addition, the 12-month average is also pointing lower and currently sits at 0.4%. A pick up in borrowing would be a sign of animal spirits and investor confidence which, for now, seems on the low side.
Whilst Trimmed Mean CPI is just a shade below RBA’s 2% target, broad inflation fell below expectations. Terms of trade has moved notably higher which, in theory, should send AUD higher. As this is a quarterly read then ToT may not provide a particularly timely tool to trade for most, yet to see Australia’s competitiveness pick up so well these past two quarters, then in theory demand for AUD should also be picking up which could helped send AUD back above 80c.
Producer prices have also begun to pick up. At 1.3% YoY, PPI is now its highest in one year and in theory should continue to track higher and catch up with the terms of trade. If production costs continue to rise, then at some point this could be passed onto the consumer. This is where it gets tricky because wage growth remains subdued and household borrowing remains high, so it is no sure think that consumers will be happy to absorb the higher producer prices at the retail end and inflation could remain below expectations. Still, with some indications pointing higher for the economy and potentially for AUD, perhaps something must give along the way and perhaps inflation will be able to return to pre-GFC levels.
Gains on GBPAUD have been impressive in recent weeks, yet we see potential for the rally to cool around current levels. Whether this turns into a sideways movement or an actual correction is yet to be seen, yet further out we think GBPAUD is poised to break higher again.
Yesterday’s high respected the upper range of both channel and stopped just shy of the monthly S3 pivot. It is not often you see a market push far beyond an S3 level, unless the pivots were calculated with a particularly low period of volatility.
However, the momentum of the bullish channel is impressive and clearly impulsive and with no noteworthy signs of divergences appearing. So, whilst we are on guard for a pause at current levels, also be on guard for a break higher. The British Pound remains a politically driven currency but one which is reaping the benefit of the pending election. With so many large speculators still net short of Sterling, many of them will consider GBP as their pain trade each tick higher it goes. If they do continue to close out positions, then this merely supports the rally.
AUDUSD continues to tease the bears and scare the bulls, yet manage to print only minor new lows. Yesterday’s spinning top Doji warns of weakness to the preceding move, although they do not generate an actual buy signal. As we remain below monthly S1 then the downside could still be the preferred route yet we also highlight the potential bullish wedge pattern which could send it back to the 0.7748 highs if successful. If the downside does give way, then 74c becomes the likely target as the round number sits very close to the 61.8% retracement.
Matt Simpson | Senior Market Analyst
A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.