AUD rises ahead of May retail sales which is expected to soften

Investors await the May retail sales figures which are expected to come in softer with a 0.4 per cent following a gain of 0.9 per cent in April, according to Bloomberg consensus. The average of the past three months has seen retail sales come in at 1.7 per cent with annual growth at 9.6 per cent.

The Australian dollar against the greenback has strengthened by 0.23 per cent from Tuesday, up 69.50 from 69.34 US cents ahead of the results at 11.30am AEST by the Australian Bureau of Statistics.

Concerns about an economic slowdown have weighed on investors as the Reserve Bank of Australia ramps up interest rate hikes to suppress inflation.

After the RBA surprised the market with a super size hike of 50 basis points this month, investors kept a close eye on any colour from governor Philip Lowe.

Last Friday in Switzerland at the UBS panel discussion, Mr Lowe said that rate hikes will be conducted in 25 or 50 basis point increments.

“We’re on a narrow path back to lower inflation” and “we can navigate that path, but there are risks – and the risks come both from the global economy and the uncertainty around households and how they are going to respond to higher interest rates” said Mr Lowe.

He also said that the country is “remarkably resilient” and is likely to avoid a recession amid interest rate hikes, the cushion in cash savings and a strong business investment outlook.

According to the Australian Prudential Regulation Authority, Australians are sitting on $1.27 trillion in savings, an increase of 22 per cent to $281 billion since the pandemic. This is expected to support retail consumption in the backdrop of high inflation.

Then what does this mean for wages growth? Mr Lowe has forecast wage growth at 3.5 per cent which is half the headline inflation which is expected to peak at around 7 per cent by the December quarter. This means that consumers are set to have less to spend if inflation continues to climb.

However, if the economic momentum continues despite the headwinds from surging fuel prices, rising interest rates, weather and Covid-19 outbreaks, Mr Lowe could have a point around the nation avoiding a recession.

Sources: RBA, Bloomberg, APRA, Trading Economics