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Aussie decelerates further on weak consumer confidence data

H.S. Borji
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The Australian dollar declined sharply against its US counterpart, as weak consumer data weighed on an already negative outlook.

Australian consumer confidence fell to its lowest level in nearly three years, as the latest federal budget weighed on sentiment. Westpac and the Melbourne Institute’s widely watched gauge of consumer sentiment fell from 99.7 to 92.9, further below the 100-level where optimists equal pessimists.

“The initial response to a budget can sometimes be an overreaction,” noted Westpac chief economist Bill Evans. “It is also true that it is not unusual for sentiment to plummet at budget time. Other comparable falls were: May 2010 (–7 per cent); May 2009 (–4.3 per cent); May 2006 (–6.4 per cent); and May 1995 (–7 per cent).”

Consumers’ mood fell sharply last year in response to the 2013 budget, making the latest drop not unexpected. However, unlike the 2013 budget, the latest government blueprint introduces tax hikes and far-reaching government spending cuts that will impact middle- and low-income households. According to the Westpac survey, nearly 60 percent of respondents expect this year’s budget to make them worse off, while only around 3 percent say they will be better off.

The government’s latest blueprint, announced last week by Treasurer Joe Hockey, seeks to return the budget to surplus by the end of the decade. In order to do so, the government has introduced a combination of tax hikes and spending cuts that will impact welfare payments and result in the loss of thousands of jobs.

Australia’s economy has come under siege the last two years, as the mining boom decelerated and unemployment reached its highest level in a decade. The slowdown in mining investment is expected to increase in the coming years, as mining companies complete major liquefied natural gas projects across northern Australia.

The AUDUSD pair fell 0.31 percent to 0.9214, a fresh two-and-a-half week low. Initial support is likely found at 0.9193 and resistance at 0.9290. The pair decline sharply Tuesday after the minutes of the May 6 Reserve Bank of Australia meetings revealed policymakers had a negative outlook on the economy.

Despite a recent string of stronger than forecast data, RBA officials said overall growth in the coming quarters would be below trend, citing spare capacity in the labour market as one of their major concerns. This suggests the central bank is prepared to keep interest rates at record lows for an extended period as the economy recovers.

Jobs growth in Australia has been upbeat since February, but the latest budget cuts, among other factors, are expected to keep the labour recovery subdued this year. The Australian government expects joblessness to rise to 6.25 percent and stay there until mid-2016.

The RBA said growth was likely to rebound in 2015-16, thanks to improvements in both non-mining business investment and liquefied natural gas exports.

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