I mentioned in my monthly economic review for China that China’s officially-sanctioned data were rather dodgy. A couple of days later, China devalued the yuan, causing forex traders to dump the Aussie in a hurry. So, is there a fundamental reason for forex traders to be bearish on the Aussie or is everything just hunky-dory?
The jobs report for July was a mixed bag of nuts for forex traders since employment change was better-than-expected, with a net increase of 38.5K jobs (10.2K expected, 7.0K previous) of which 12.4K are full-time jobs, but at the same time, the jobless rate was a severe disappointment since it climbed higher to 6.3% and the previous reading was revised higher to 6.1% from 6.0% to boot.
Scanning through the details of the report, it looks like the labor force participation rate went up by 0.3% to 65.1%, which means that more working-age people are now active in the labor market. More importantly, this implies that the Australian economy wasn’t able to absorb the influx of new workers since the number of unemployed people climbed higher by 40.1K despite the net increase in jobs, thereby pushing the jobless rate higher.
On a more upbeat note, Q2 2015 hourly wages in Australia increased by 0.6% quarter-on-quarter and by 2.3% when compared with Q2 2014. All industries saw an increase in wage growth, including the mining sector, which saw a 0.5% growth quarter-on-quarter and a 2.0% growth year-on-year even though it has been under pressure due to lower Chinese demand for Australian commodities.
Consumer Sentiment & Spending
The Westpac-Melbourne Institute’s consumer confidence index in August jumped by 7.8% to 99.5 after dropping to 92.2 back in July, which was the lowest reading since December 2014. Unfortunately, the reading is still below the 100.0 neutral mark, so the majority of blokes and sheilas are still none too happy with the current state of the economy.
According to the report, the sudden surge in confidence was probably due to “the tensions in Greece and the Chinese equity market no longer dominating the media.” I have to add, however, that this report was released on August 12 (and the surveys were conducted before that), so the Chinese yuan’s depreciation has not been factored in yet.
Moving along, forex traders took the Aussie higher when consumer spending in Australia continued to show strength, with the retail sales reading for June increasing by an unexpected 0.7% month-on-month. And as an added bonus, the previous reading was revised higher to show a 0.4% increase from 0.3%.
The primary driver for the increase seems to be the 2.2% jump for the “household goods” component, which covers furniture, electrical goods, computers, building hardware, and garden supplies among others. The main drag, meanwhile, was the 1.4% decline in the “clothing, footwear & personal accessory” component.
Business Conditions & Sentiment
Forex traders bullish on the Aussie got bushwhacked when the National Australia Bank’s (NAB) business confidence index dropped to 4 points in July while June’s reading was downgraded to 8 points from 10 points. NAB’s economists noted that the decrease was due to the easing of confidence among mining and construction firms, which suggest that “an escalation in Chinese growth concerns could be putting firms on alert.”
NAB’s business conditions survey also dropped by 4 points to 6 points in July, although NAB economists emphasized that “both conditions and confidence are suggesting a turnaround in the non-mining economy,” with the service sector leading the charge.
The Australian Industry Group’s (AIG) performance services index supports this since it climbed higher by 2.9 points to 54.1 in July, thanks to steady domestic demand.
The greatest driver for the climb was the 9.6 points increase in the “property and services” sub-sector (54.5 current, 44.9 previous). This is followed by the 7.3 points increase in the “hospitality” sub-sector (45.8 current, 38.5 previous). Do note that it’s still below the 50.0 neutral mark, though, so that industry is still contracting albeit at a slower rate. Moving along, the “retail sales” sub-sector remained robust since it increased by 1.8 points to 53.8 points, which is the fifth consecutive month of expansion and lines-up with the unexpected pick-up in retail sales mentioned earlier.
Incidentally, the AIG also measures Australia’s manufacturing PMI, and the PMI reading for July improved substantially after posting a contraction back in June (50.4 current, 44.2 previous).
Interestingly enough, the PMI reading for the “textiles, clothing, footwear, furniture and other” sub-sector declined by 3.2 points to 49.3 points. This decline coincides with the retail sales data mentioned earlier, which identified the same sub-sector as the main drag. Another interesting detail in the report is the “metal products” sub-sector, which increased by 3.3 points to 43.0. The increase was apparently due to the lower Australian dollar, but the industry is still contracting, thanks to lower commodity prices and “declining mining investment.”
Summary & Potential Effects on the Forex Market
Overall, there is still some slack in the labor market, but wage growth is picking up and consumer spending remains surprisingly robust. And these, in turn, have been keeping the economy supported.
That’s great and all, but what does it all mean for forex traders? Well, it means that some forex traders may be inclined to keep the Aussie supported until the next data dump, especially now that the Reserve Bank of Australia (RBA) is no longer calling for further Aussie depreciation. Developments in China and commodity prices could still affect a shift in sentiment, though.