Japanese GDP Boosts JPY

JPY was stronger over the European morning following the latest data, realized overnight, which showed that Japanese GDP grew 0.3% over Q3. The increase is a result of a 0.5% positive contribution from net exports and a 0.2% negative contribution from domestic demand. Real private consumption decline, in line with expectations, after rising in Q2 while real exports showed solid growth after an adjustment in Q2.

The fall in private consumption, which was a sharp 0.5%, was mostly in reaction to the 0.7% increase seen over Q2. This reflects continued growth in non-durable spending and semi-durable alongside the first decline in durables spending in seven quarters. Services spending also fell for the first time in six quarters.

Looking at other areas of domestic demand, private capital expenditure rose 0.2% quarter on quarter, marking its fourth consecutive quarterly gain while housing investment fell for the first time in seven quarters. Considering the improvement in consumer sentiment and stronger overseas demand, both private real consumption and exports are expected to increase over Q4.

Technical Perspective

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USDJPY continues to trade within the broad 107s to 114s range which has framed price action over much of the year. After another attempt recently at breaking the topside of the range, the price has since reversed and fallen lower. The next key support level for USDJPY will be the 111.60s area which was the October low. If price holds this level, we are likely to see a further run to the topside.

Weak Wage Data Exacerbates RBA’s Concerns

AUD was under pressure over the European morning as the latest data showed that wage growth remains weak in the country. Despite a rise in the minimum wage, overall wages increased just 0.5% quarter on quarter, and 2% year over year.

Private sector wage growth is sitting at around 1.9% year over year with weakness fuelled mainly by the mining sector. However, an improvement has been noted in manufacturing, industrial, financial and business service sectors. Wage growth was also seen rising in public administration and social sectors through wage growth in retail trade has continued to weaken as online retailers continue to gain market share.

Full-time employment has been rising strongly over 2017, but wage growth remains a real issue as it continues to lag this trend. This can partially be explained by low wage expectations. However, in its latest Statement on Monetary Policy, the RBA noted that low wage growth remains a puzzling issue for the bank and poses a great deal of uncertainty for the economy. Speaking recently, RBA’s Harper commented that the RBA cannot rule out a further rate cut was weak household incomes, and subdued wage growth poses a serious threat to the momentum of the economy.

With wage growth continuing to pose a difficulty, the market is further unwinding its hawkish RBA expectations which had built up over the first half of the year, linked mainly to the general shift in tone seen among many of the G10 central banks. The latest COT data shows that investors have been steadily covering Aussie long positions over recent weeks, a trend that is likely to continue in light of this data.

Technical Perspective

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Having broken down through the 50% retracement from December 2016 lows, AUDUSD is now challenging the rising trend line support running from the same levels. A break here will open up the way for a deeper move down to test the 61.8% retracement around .7526. The decline in AUDUSD has been fairly ordered, and the market now looks to be at the start of another leg lower. A break back above the 50% retracement level will be needed to alleviate short-term bearishness.