Data and RBA Meeting--Not Much for Aussie Bulls

The Australian dollar has been on a tear. It was the strongest of the G10 currencies over the past month, appreciated 8.6% against the greenback, nearly a third more than the New Zealand dollar and more than twice the performance of the Canadian dollar.

A great deal of good news has been discounted. The non-commercials at the IMM have recognized this and have amassed a net long position that is nearly six times larger than existed in late May. In the week ending last Tuesday, the non-commercials increased the net long position by around 25%.

Before the results of the RBA meeting at 4:30 GMT on Tuesday, Australia reports June retail sales and building approvals. These reports are likely to be subdued. The new wire consensus is for a 0.4% rise, but the risk appears on the downside. At least one month in each quarter in 2009 and thus far in 2010, Australian retail sales contracted. This has not been the case in Q2 as retail sales rose 0.6% in April and 0.2% in May. While employment has been fairly strong, it does not seem to be spurring shopping.

Rising interest rates is cooling off the Australian housing market. Building approvals have been falling this year, with the sole monthly exception being March, but that gain was completely unwound (and more) in the April and May period. Year-over-year figures have generally held in better because of very poor 2009 comparisons, but here too the pace is slowing. The 26.6% year-over-year pace in May is expected to ease to about 16% in June.

The RBA has indicated that inflation will be the key to the trajectory of its monetary policy. That means that the retail sales and building approval data is unlikely to have much impact on policy. The next inflation report is not out until October. Recall that last week, Q2 CPI was reported at 0.6%, vs expectations of a 1% increase and a 0.9% rise in Q1. The RBA's trimmed mean stands at 0.5%, down from 0.8% in Q1.

With a 6.4% appreciation on a trade weighted basis, and subdued inflation readings, the RBA can afford to be patient. This is especially true given the uncertain global economic outlook, which includes China's PMI at 17 month lows and the string of disappointing US data. The RBA's cash rates sits at 4.5%. It can sit there for a couple more months.

Like sterling, the Australian dollar moved above its 200 moving average last week. Given the bullish sentiment and the momentum, look for pullback toward this area (~$0.8960) to be seen as a new buying opportunity. Although a number of technical readings are stretched, there is no compelling sign that an important top is near. Many participants are looking for a test on this year and last year's highs ($0.9389 and $0.9406 respectively).