AUD's big week

There were a lot of potential market moving events for the Australia dollar this week, including a large amount of domestic economic data and a policy meeting at the Reserve Bank of Australia (RBA). There has also been some important manufacturing data out of China in the last week.

China’s manufacturing data

The market was keeping a close eye on manufacturing figures out of China. Official Manufacturing PMI jumped to 50.8 in May, from 50.4 in April, which was slightly better than expected. Later in the week, HSBC released its own Manufacturing PMI with the final figure for May printing slightly below the flash estimate (actual 49.4, expected 49.7). Also, the World Bank noted that Beijing has the ability to see China to its 7.5% growth target for this year – the economy grew 7.4% y/y in Q1.

Building approvals fall for the third straight month in Australia

However, China’s official manufacturing data was muted by some disappointing housing market data. Building approvals slumped for the third straight month during April, falling 5.6% m/m (expected 2.0%). March’s number was also revised lower to -4.8% from -3.5%. Overall, the data was worrying enough to cause a small sell-off in the Australian dollar.

The RBA maintains the status quo

On Tuesday, the RBA left the official cash rate at a record low 2.5% for the ninth straight month as expected. The market was more interested in the statement by Governor Stevens that accompanied the decision. Stevens was careful not to rock the boat, issuing a very similar statement to the one that followed last month’s policy meeting. In saying that, the bank correctly noted that exports were the driving force behind the economy in Q1, while also dropping one line about weakness in the labour market and adding another about how surprised it is by the Australia’s dollar’s resilience. Despite this, a failure to mention a recent downturn in business and consumer sentiment and retail growth was taken as a positive by the market, which has helped to support the Australian dollar.

Australia’s somewhat misleading GDP figures

After the RBA came Q1’s GDP figures, which beat expectations but the internals of the report failed to impress. Q1 GDP increased 1.1% q/q (expected 0.9% q/q), largely due to a 4.8% increase in exports over the quarter. At first glance this appears to suggest that the economy is doing measuredly better than expected. While it did grow at a faster than expected pace last quarter, mining accounted for 80% of Q1’s expansion.

As we stated at the time, the market knows that mining investment is going to dwindle and non-resource parts of the economy are going to have to pick up the slack. There are some signs of life in non-resource sectors, but we have seen a dip recently in consumer confidence and spending, highlighted by a disappointing 0.2% increase in retail sales during April, which could hamper growth outside of the mining sector in coming quarters if it continues. Hence, the Aussie initially jumped higher on the back of the GDP figures but the rally ran out of fuel very quickly and started to unwind as the market digested the internals the report.

Australia’s trade data

The Australian dollar was spooked by an unexpected drop into negative territory for Australia’s trade balance. A 1% drop in exports helped to create a 122M deficit in the trade balance during April, down from a revised 902M surplus in May. The fall in exports in April was slightly disappointing, but overall the internals of the report weren’t overly concerning.

All eyes on the US

Tonight’s deluge of US employment data is going to be very important for AUDUSD. The market is currently expecting a change in NFP of 215K and a rise in the unemployment rate to 6.4%. The other details (data due at 1230GMT):

• Participation rate May – exp. 66.2
• Average hourly earnings May – exp. 0.2% m/m
• Change in manufacturing payrolls May – exp. 10K
• Labour productivity Q1 – exp. 0.0 vs. 1.0% q/q