Australian Trade And Building Permits - Impact On AUD/USD

Release: AUS Trade Balance (Dec)
Flash Reading: 1.22B
Previous: 1.38B
Date/Time: 01/31/12 7:30PM ET (03:30 GMT, 02/02)
Release: Australian Building Approvals (Dec)
Consensus Forecast: 2.1%
Previous: 8.4%
Date/Time: 02/01/12 7:30PM ET (00:30 GMT, 02/02)

Global Manufacturing Rebounds in January, How Did Aussie Trade Do in 4Q
Today's global manufacturing reports were generally positive. When you average the major PMIs, they edged up to 51.4 from 50.5 in December, JP Morgan says. That shows that industrial production picked up after a lull in the 4th quarter. More production is good for Australia's export sector, as it has plenty of raw materials - iron ore, coal - to ship to developing nations like China and India.

Australia's terms of trade has been a major strength for the Australian Dollar. The trade balance has been in surplus 19 out of the last 20 month, and is a major reason that the Australian economy has been able to weather some soft domestic demand and a cooling housing sector.

A surplus of A$1.22 billion is expected, which would be the lowest reading in 9 months. A positive surprise would have a positive impact on Australian equities, and can help boost the value of the AUD.A negative surprise would perhaps undermine the recent Aussie gains, and give the AUD/USD pair a chance to retrace its steps from its highs in the NY session.

Australian Housing Facing Tailwinds, How Will Permits Hold Up?
Speaking of the housing market, Australia also releases its latest reading on building permits. Permits are expected to rise 2.1% in December, following an 8.4% increase in November.

That would mean a slowdown in constructions, and the possibility of an undershoot is strong considering the weaker data seen in both housing prices and new home sales that came out in the Wednesday's Asian session.
From Bloomberg: 'Australian house prices plunged by the most on record in 2011 as global economic uncertainty and concerns about its impact at home kept a lid on demand.

An index measuring the weighted average of prices for established houses in eight major cities slid 4.8 percent from a year earlier, according to the Australian Bureau of Statistics, the biggest calendar-year drop since the data began in March 2002.

They fell 1 percent in the three months to December from the previous quarter, when they retreated a revised 1.9 percent. The median estimate of 15 economists surveyed by Bloomberg News was a 0.6 percent quarterly fall.'

'Sales of new homes fell a seasonally adjusted 4.9 percent in December, with detached house sales dropping 7.7 percent, a separate report from the Housing Industry Association showed.'

Falling housing prices are a sign of a weak housing market where supply exceeds demand. The RBA cut interest rates twice at the end of 2011, and so there should be some positive lift on housing from that, and there still remains a structural shortage of housing in the country

Still, the run up in prices in Australia over the last 20 years has been quite massive, and therefore the sector may still only be in the beginning stages of a peak in the housing market. The image above runs through 2010 (click for larger image) and gives you the sense of how inflation prices have gotten compared to the average income.

Building permits data will be another key gauge as to the health of the housing market in Australia and can help impact equities as well as the decision that the RBA will make regarding interest rates when it next meets on February 7th.

And What's Next for Aussie?

In the bigger picture, we are intesly interested in what happens next for the AUD/USD and today's reports can be an important risk event. Overtly negative readings can be a catalyst for a decline in the pair, while better than expected data can help push the pair to test key resistance levels from the 2nd half of 2011.

The pair has had an impressive run since mid-December, and now approaches a key critical level from late August and late October at 1.0750. The daily RSI is also approaching 'overbought' levels, though it has maintained its rally since hitting the '70″ level 2 weeks ago.