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Summary: Australian retail sales rebounded in July with a month-on-month growth of 0.5%. The mid-term downtrend of the AUDUSD has reached oversold conditions, showing some signs of weakened downward momentum, though not fully dissipating.

Fundamentals

Australian retail turnover increased by 0.5% month-on-month in July, reaching AUD 3.538 billion, surpassing the expected growth of 0.3%. Compared to July 2022 data, turnover increased by 2.1% year-on-year.

Ben Dorber, ABS head of retail statistics, noted that the rise in July is a partial reversal of last month’s sharp decline in turnover. He attributed the June downturn to "weaker-than-usual end of financial year sales." However, Ben Dorber cautioned against interpreting the July data as a sign of robust development in the retail sector. In discussing the underlying dynamics of the industry, he stated, "While there was a rise in July, underlying growth in retail turnover remained subdued."

Ben Dorber pointed out a lack of substantive changes in trends: "In trend terms, retail turnover was unchanged in July and up only 1.9 percent compared to July 2022, despite considerable price growth over the year."

Market observations suggest that Australian retail turnover was stronger than expected in July, growing by 0.5% month-on-month. However, this is still insufficient to offset the 0.8% decline in June. The potential trend in retail sales and observed expenditure data indicate that households are significantly cutting back on spending.

Consumer confidence is also notably weak, and the expiration of fixed interest rate periods means more household budgets are squeezed by high rates and inflation. We believe that throughout 2023, Australian households will continue to tighten their expenditures. However, with inflation slowing and actual household incomes turning positive, there is expected to be some upward room for spending in 2024.

The anticipated Australian CPI for July is expected to decrease from the previous month's 5.4% to 5.2%. These recently introduced monthly inflation indicators are crucial for the policy calibration of the Reserve Bank of Australia, as previous data was released quarterly. For this month, the key risk lies in the energy sector, with the timing of national energy subsidies and electricity bill increases potentially having an impact.

Previously, RBA Governor Lowe emphasized that bringing inflation back to target levels is their primary task, while also warning that the central bank may need to further tighten monetary policy. However, the current market expectation is that the RBA will maintain the interest rate at 4.1%, with around a 90% probability.

Technical Analysis

Since testing the high at 0.6896 on July 13th, 2023, the AUDUSD pair has been exhibiting a mid-term downtrend. So far, the asset has plummeted by 530 pips from its high on July 17th, 2023. The recent four-week decline has pushed the price into oversold territory, culminating in a bullish divergence observed last Friday.

These observations suggest that the ongoing mid-term downtrend in this asset might have been alleviated, supporting the potential for a minor corrective upswing. These positive factors are also aligning with a key support level at 0.6385 (notably higher lows), coinciding with the low from November 10th, 2022, and the 76.4% Fibonacci retracement of the earlier mid-term uptrend.

However, we emphasize that there is still room for a substantial decline, though breaking below the major support level of 0.6170 seems unlikely. Before testing that bottom, we consider another support level at 0.6272. While we may not have been entirely wrong in our outlook when the asset dropped to the low at 0.6364, the recent deceleration in the downtrend might merely be a "false dawn" before an impending upward move. In terms of trading strategy, a preference for going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 0.6420

Target Price: 0.6258

Stop Loss: 0.6530

Valid Until: 2023-09-11 23:55:00

Support: 0.6364, 0.6299, 0.6271

Resistance: 0.6451, 0.6489, 0.6522