Monthly Economic Review: Australia

G’day forex mates! In its most recent monetary policy decision, the Reserve Bank of Australia (RBA) thought it best to maintain rates at record-low levels. So, is Australia’s economy in such bad shape? Time to find out!

Employment

The labor report for June was optimistic overall. The jobless rate ticked higher by 0.1% to 6.0%, but only because May’s estimate was revised from 6.0% to 5.9%. As for the labor force participation rate, it saw an uptick from 64.7% to 64.8%, which is good news since it means a larger percentage of the working-age population are now economically active.

And while employment only increased by 7.3K, a closer look at the report shows that full-time employment increased by 24.5K while part-time employment decreased by 17.2K. The fact that more full-time jobs were created is a very good thing since full-time jobs generally offer higher wages and better security of tenure than part-time jobs and those, in turn, contribute to higher consumer confidence and spending.

Consumer Spending & Sentiment

Most blokes and sheilas ain’t too happy with the economy since the Westpac-Melbourne Institute’s consumer sentiment index in July showed pessimism for the second consecutive month, decreasing from 95.3 to 92.2 (100.0 is the neutral mark). This is “the lowest print of the index since December last year.”

According to the report, consumer sentiment was dampened by concerns over Greece and the “sensational coverage of the collapse in the Chinese share market.” Looking at the historical trend, consumer sentiment in Australia has been pessimistic in 10 of the past 12 months.

The retail sales reading for May was a little more optimistic since the seasonally-adjusted estimate rose by 0.3%, although the previous reading was downgraded from 0.0% to -0.1%.

Housing data was pretty bad, though, since home loans in May decreased by 6.1% and the previous reading was downgraded from a solid 1.0% increase to only 0.7%.

Business Conditions & Sentiment

The consumers may not be too be happy, but businesses are grinning like a shot fox since the National Australia Bank’s (NAB) business confidence index increased to 10 points in June from 8 points back in May, which is the highest level since September 2013.

Based on the report, all sectors are now showing optimism, except for the mining sector, which has a neutral sentiment since it currently has zero points. The business conditions index also jumped to 11 points in June from 6 points, which is the highest level since October 2014.

NAB also released its quarterly business survey, and it was good. Q2 business confidence increased to 4 points from 0 points previous while quarterly business confidence also increased to 4 points from 1 point back in Q1. Like in the monthly survey, all sectors saw improvements in business confidence, except the mining sector.

To the newbie forex traders out there who are wondering why I keep mentioning the mining sector, it’s because the mining sector is the main driver of Australia’s economic growth given that it comprises a very significant chunk of Australia’s export-driven economy. In 2010-2011, for example, the mining industry contributed 55% of the total value of exported Australian goods. Crikey!

Trade data was pretty decent too. And even though Australia’s trade deficit in May gobsmacked most forex traders and analysts since it came in worse-than-expected at 2.75B AUD, it was still better than the previous 4.14B AUD deficit, and a narrowing trade deficit is generally a good thing.

Inflation

Quarter-on-quarter CPI came in as expected at 0.7%, a significant improvement over the previous 0.2% increase. On an annualized basis, CPI rose by 1.5% (1.3% previous), which means that the downward trend has been finally broken and that’s a very good thing.

Interestingly enough, the main contributor to the increase was the transport group (+3.4%) due to a 12.2% rise in automotive fuel. The main drag, on the other hand, was the recreation and culture group (-1.4%) due to a 5.4% decrease in domestic holiday travel and accommodations as well as a 1.3% decrease in international travel and accommodations.

The Australian Bureau of Statistics was quick to add that such decreases were due to the off-peak season, and were therefore nothing to be too worried about. On a more interesting note, Aussies also seem to love their durries (Aussie-speak for tobacco) and amber fluid (Aussie-speak for beer) since the alcohol and tobacco group contributed a solid 1.2% increase to CPI.

Summary & Potential Effects on the Forex Market

Overall, the most recent economic data, with the exception of consumer data, are seeing some improvements. And while that is promising, Australia still remains dependent on its commodity exports such as iron ore – a large chunk of which goes to China. And aside from China’s own economic problems, many analysts are already projecting even lower iron ore prices due to oversupply, which is bad news for Australia.

So what are the potential effects on the forex market? Well, we can expect short and medium-term buyers to slow down the Aussie’s fall versus its forex rivals until the next data dump (or a surprise event comes along). Most long-term forex traders would probably be bearish on the Aussie, though, given Australia’s circumstances.