Forex Investment and Currency Trading

Australia: Based on two reports this past week on investment (the construction work and private capital spending surveys), the view is affirmed that Australian GDP (reported on Wednesday) will be flat or possibly negative in 1Q 2008. The investment reports did show strength in infrastructure spending (engineering) but a flat quarter for residential construction and a decline in business investment on plant and equipment. On the other hand, both reports showed that the pipeline of work, and planned investment in fiscal year 2008-09, remain strong, undeterred by the tougher global business climate. These pipelines and investment intentions are of course subject to pullback risk but it certainly tempers any disappointment about the weak contribution of investment to first quarter GDP.

The week ahead includes the remaining pre-GDP first quarter reports, some partial indicators for April (retail sales, building approvals and foreign trade), AiG industry survey results for May, and the June decision from the RBA on Tuesday. As far as the data is concerned, consensus is for a small gain in quarterly GDP of 0.3% but the range varies from +0.5% to -0.2% . Generally the markets have done a good job recently in predicting GDP with the last two quarterly results right on consensus. But consensus is still being shaped by upcoming inventory, net export and government spending data on Monday and Tuesday and then the wild cards are the small but volatile pieces which have not been largely “pre-announced”. Overall, we would rate the chance of a negative outcome at 30% to 35% with the key being how much of the import surge in the quarter went into inventory build.

Despite the “bombshell” in the recently released May meeting minutes that “members spent considerable time discussing the case for a further rise in the cash rate” and that the RBA still has a conditional tightening bias, there is almost universal belief that the RBA will stay on hold in June. Most attention will be on the wording of the accompanying decision and how it stacks up against the curve’s pricing in of one 25-bp hike later this year, most probably in August. Since the early May Board meeting, the Federal budget on May 13 contained few surprises, the March data has been obscured by the early timing of Easter and if anything concerns about inflation have increased including the Westpac/MI measure of inflation expectations, which hit almost an all-time high of 5.2%. The AUD is up about 2% on a TWI basis since the last decision although the bank mentioned in its May minutes that “rise of the exchange rate over recent months had been less than might have been expected given the strength of commodity prices.” While there will be no rate hike in June, it is difficult given the trends described above to see the RBA backing off its implicit warning that rates may need to rise again later this year.