The Australian dollar had been a star performer throughout the 2009 and 2010 during the height of carry trade brought about by the Fed’s quantitative easing.

The economy was able to skirt a recession in 2008, and thanks to its mining sector, the unemployment rate below 5%. However, recently the economy has not been showing very positive signs.

Can Business Confidence Report Shift the Fundamental Bias of AUD?

A business confidence report brought that point home as the NAB index fell sharply in August. The labor market has slowed considerably with monthly employment averaging around 2.8K for the first eight months of this year. Business confidence was mainly affected by “high-end global uncertainty, large falls in equity markets and the fear of market contagion” which shows that troubles in the euro zone are having an impact on the Asian Pacific commodity-based economy.

The RBA has kept interest rates steady at 4.75% for the last 10 months, and if the economy deteriorates the likeliest scenario is for an interest rate decrease rather than an increase.

That would the a negative fundamental factor for the Australian dollar.

Data on Consumer Confidence To Give Us Clues About Consumer’s Moods

Tonight,  Australia releases data on consumer confidence giving us an inside look at consumer’s moods in August. The index, put out by the Melbourne Institute, has been negative for four out of the last five, and five our of the last six months. Consumers and households have being battered by a stock market that has declined for five straight months. On top of that, consumers are facing the highest interest rates in the developed world.

If the report is negative, that would mean that consumers will retrench from spending as a result of the uncertainty, higher borrowing costs, and softness in job creation and housing.

If Asian Growth Slows, AUD Would Struggle

Growth in Asia is expected to slow somewhat due to weak demand from US and the euro zone, and as Asian central banks boosted interest rates in order to battle inflation. While the tightening campaign by Asian central banks may be done, it will still bring about a cooling effect on the region – affecting Australia’s trade dynamics.

A combination of slower regional growth and the possibility of lower interest rates could put pressure on the Australian dollar as we go through the last 3 1/2 months of 2011. That runs counter to my analysis from earlier this week that further falls in the AUD may make it a good candidate for a rally on its fundamental positive – but the data this week may change that narrative, or at least make us alter our strategy if need be.

We always have to be looking for the important piece of news or data that can shift the fundamental bias for a currency, and we’ll see if this week’s confidence reports weight a little heavy on the Australian Dollar. A positive consumer confidence report would have the opposite effect, helping to boost the Aussie’s prospects. In this case, I will juggle the bullish and bearish scenarios until the data points me in the right direction.

Housing Starts, Inflation Expectations, Motor Vehicle Sales

In addition to consumer confidence data, Australia also releases measure of housing starts for the second quarter. It’s expected to show a flat reading following a 3.1% increase in first-quarter. The Australian housing sector, like the stock market, has seen price declines and activity in the sector has seen a strong slowdown.

In Thursday’s Asian trading session – Wednesday evening for US traders – the Melbourne Institute will release its inflation expectations index which measures expectations for the inflation over the next year. It’s expected to show 1-year inflation expectations at 2.7%. Following that will be new motor vehicle sales for the month of July. Previous month car sales rose 8.6% – a healthy sign of consumer spending – though mainly this was a bounce back to the weak sales seen in the wake of the Japanese earthquake and supply disruptions.

Nick Nasad
Chief Market Analyst
FXTimes

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.