Mixed data from Australia, downbeat remarks on Brexit

Summary:

• Higher than expected trade surplus and weak retail sales from Australia in January
• European officials doubt any breakthrough on Brexit could be reached during talks this week
• Major currencies trade barely changed, stocks move lower

Antipodean currencies little higher

Both Australian and New Zealand’s dollars are leading the gains this morning in the G10 basket trying to recoup at least part of losses incurred earlier this week. However, the reason for such a rebound is mixed at best as we were offered some ambiguous macroeconomic indicators from the Australia’s economy.

Retail sales growth has stalled in recent months in Australia. Source: Macrobond, XTB Research

First and foremost, Australia’s retail sales rose just 0.1% MoM in January falling short of the median estimate of a 0.3% MoM increase. This reading could be seen particularly weak given the fact that we got a 0.4% decline in December. Moreover, the underlying trend in retail sales does not look well as evidenced by the chart above. Furthermore, taking into account the low level of savings kept by Australian households (the yesterday’s data showed only a marginal bounce in the savings ratio) one may suspect that consumer spending could be hindered in months or even quarters to come. This suggests that this part of the Antipodean economy is unlikely to contribute to GDP growth in a scale we have seen recently. In our view consumers could be discouraged from higher spending due to a wealth effect stemming from slumping house prices as well as tighter credit conditions. On the other hand, the trade data showed a 4549 million AUD surplus, a much higher number compared to 2650 million AUD expected. Both imports grew 3% while exports rose 5% in monthly terms. Finally, construction PMI jumped in February ticked up to 43.8 from 43.1, however, it stayed deep into a contraction territory. All in all, it looks that investors are cashing on their recent shorts on Aussie. Let us remind that the Australian dollar has had a bad start to this week after gloomy inventories, net exports and finally GDP growth.

The Aussie has approached the crucial demand area localized at around 0.7020. Technically one hope for a rebound, albeit the Aussie has quite weak foundations. Source: xStation5

Brexit developments

Being three weeks before an official date when the UK has obliged to leave the European Union it looks that any breakthrough on Brexit during the talks this week is unrealistic. Such downbeat remarks have been expressed by European officials who suspect that whatever they offer it will not be enough to get the UK Parliament to back Theresa May’s plan. What’s next on Brexit? On March 12 the UK Parliament is likely to reject the current May’s deal. If so, MPs will vote the next day whether the UK should leave the EU without any agreement, again this is very unlikely to be accepted. Therefore, the most probable scenario assumes MPs will vote in favour of extending the period until the UK would have to leave the block beyond March 29. Under these circumstances one may expect that a possible extension agreement could be signed at the March 21/22 summit. The pound did not respond to these downbeat comments from European officials.

The EURGBP appears to be prepared for declines given the fact that the cross failed to move back above 0.8650. Source: xStation5

In the other news:

• Chinese Finance Ministry said that tax cuts were top fiscal priority in 2019