OVER the past months the land down under has been hit by climatological disasters of near biblical proportions. At the start of the year, economic activity in the state of Queensland was brought to a virtual standstill after floods covered an area larger than France and Germany combined with a blanket of water. Then a cyclone nearly as big as the continental United States swept through, wreaking further havoc. However, when the dust settled, the damage from all of the disasters was relatively minor, totalling approximately AUD$20bn. The impact on the currency markets was smaller still, with the Aussie quickly recovering to surge above parity once again.
The Reserve Bank of Australia’s (RBA) persistently hawkish bias has been the primary reason for the unit’s surprising strength. Last week, the Australian central bank signaled that it will largely look past the recent natural disasters and focus on the “medium prospects for economic activity and inflation”. Traders interpreted that by pricing in yet another 25 basis point rate hike by May.
However, the currency markets may be too optimistic about the prospects for another rate increase. Australian domestic demand has been tepid, with the retail sales figures on Monday printing at 0.2 per cent versus 0.5 per cent forecast.
Despite the lacklustre conditions of the retail front, labour markets remain vibrant, with ANZ job advertisements rising by 2.4 per cent from 1.2 per cent the month prior. Labour demand will be the key factor in determining the RBA’s view on rates as the central bank carefully analyses the latest employment numbers due tonight at 12.30am. If the labour data shows further job creation, the RBA will ignore the weak retail sales numbers as a temporary slowdown and will most likely maintain its hawkish posture. On the other hand, if the employment data misses its mark of generating 20,000 new jobs or, worse yet, shows an unexpected contraction, the Aussie could see a much more significant correction, dropping back below parity as traders temper their expectations of any RBA hikes in the foreseeable future.