Friday, May 31, 2013

Market Analysis: Australia

As I've noted before, I'm bearish on Australia (see here, and here). Their central problem is that they are very dependent on China as an export market for Australian raw materials.  So as China slows, Australia's economy will follow suit.

Here is a summary of the Australian economy from the latest central bank's minutes:

Prices of tradable items fell substantially in the March quarter, with price declines widespread across items despite the relative stability of the exchange rate over the past couple of years. Members discussed the downward pressures on domestic costs and margins and the resulting declines in tradables prices, and whether these pressures would continue. In contrast to tradables inflation, non-tradables inflation appeared to have increased a little over the past year (abstracting from the direct effect of government policy changes). In the March quarter, inflation in new dwelling costs had risen, although inflation in a range of market services and non-traded food prices had eased. 

Other domestic data over the past few months had been mostly consistent with the earlier forecasts for growth of economic activity to remain a little below trend over 2013. Labour market conditions had remained somewhat subdued in recent months and the unemployment rate had edged higher, with trend employment growth below the rate of growth in the working-age population. Indicators of job advertisements suggested a degree of stabilisation, albeit at relatively low levels, while the Bank's liaison suggested that firms remained cautious about hiring staff.

Members noted that household consumption appeared to have strengthened early this year. The volume of retail sales had increased noticeably in the March quarter, and liaison suggested that retail sales had increased further in April. Indicators of consumer sentiment were above average levels, with reported buying conditions for dwellings and motor vehicles at relatively high levels. Sales of motor vehicles declined in the March quarter but remained at a high level. 

Dwelling prices were around 4 per cent above their trough in mid 2012, and auction clearance rates had increased. New borrowing for housing had also picked up, while forward-looking indicators and the Bank's business liaison suggested that demand for new housing was improving – notwithstanding a decline in building approvals in the March quarter – with enquiries from prospective purchasers and visits to display homes increasing. New dwelling investment had increased since the middle of the previous year, with members observing that approvals for higher-density dwellings had increased, while approvals for detached dwellings had been flat over this period. 

Members noted that survey-based measures of conditions in the business sector remained below average, although some measures of business confidence had picked up a little in recent months. Indicators of business investment in the near term remained soft: capital imports had declined in recent months, office vacancy rates had risen and indicators of capacity utilisation were below long-run average levels. Liaison continued to suggest that firms remained cautious about undertaking significant expansion. Consistent with this, growth of business debt had been more modest in the early part of 2013.

There are a few important developments mentioned above.
  • Australia is a raw materials exporter, so the recent decline in commodity prices is very important for their economy.  Right now, the overall condition of the commodity markets they are weak.  While there is not an imminent crash around the corner, the Chinese slowdown and ample supplies of copper and oil are having a depressing effect on prices.
  • The Australian consumer appears to be holding his own.  While unemployment has ticked up, it is still low at 5.5%.  While auto sales were down month to month, they did increase 3.3% from last year.   And the trend in retail sales is strong.
  • However, the business environment is not good.  Consider this summation from the latest monthly business survey: The business environment remained difficult in April, with business conditions improving only marginally, after slumping to the lowest level in almost four years in March. There were only modest improvements in trading conditions and profitability, mostly offset by worse employment conditions – the weakest in four years. Implied job losses were most prevalent in manufacturing, wholesale and now recreation & personal services sectors, (where labour cost pressures were highest). Persistent weakness in forward indicators of demand, combined with tight fiscal policy settings, imply little improvement in near-term activity – indeed suggest modest weakening.
Let's turn to the Australian ETF:

Prices penetrated the near year-long rally earlier this month and have continued lower since.  Prices have brought the shorter EMAs lower and have also led to the shorter EMAs crossing below the longer EMAs.  We also see s slight bump in volume on the sell-off.  Prices are now slightly below the 200 day EMA.  Momentum is declining and volatility is increasing.

The Fib levels and Fib fan levels are now downside targets for price action.

In addition to a drop in the Australian ETF, prices of the Australian dollar's ETF have also dropped.  The key point on this chart is prices have moved through key technical support at the 100-100.5 level.  This makes the yearly low around the 94.5 level the logical price target.

The Australian dollar has become more important over the last few years as a reserve currency, which is the reason it has remained at high levels.  However, the Australian Central Bank recently lowered rates (which were some of the highest in the world), which helped to lead to the decline in prices.