By Roger Ward from Cairns Mortgage Brokers

Reserve Bank governor Glenn Stevens has strengthened his commentary around the Australian dollar,  referring to it as "overvalued, and not just by a few cents". 

He did not go as far as restoring the easing bias but did quote market pricing as indicating that " if a move were to occur over the next several months ... it would be down, not up." 

He also noted that "we still have ammunition on interest rates." 

Market pricing is now pointing to a 40% probability of a rate cut by year's end.

Retail sales contracted in May by 0.5% following a 0.1% dip in April and a flat March print. 

Overall sales fell by 0.5% over the 3 months. 

That represents a very sharp slowdown in retail sales (see Fig 1), which, if sustained will most likely ensure a considerable drag on demand and a likely slowdown in jobs growth as businesses link employment decisions to demand.

We expect that the negative impact of the Budget on confidence and spending will ease as we move through 2014. 

Strong fundamentals around a high savings rate and a large wealth effect ($700bn lift in 2013) are likely to underpin a lift in the consumer in the second half of 2014. 

Further, there is considerable opposition to some of the more unpopular Budget initiatives in the new Senate, potentially indicating some compromise.

 We also noted some lift in sentiment toward housing in the June Consumer Sentiment survey. 

"Whether now is a good time to buy a house" lifted by 11% in the June survey after falling 34% over the previous 8 months. 

That index has had a reliable lead over house prices of around 6 months and correctly predicted the slowdown in house price momentum.

The momentum in housing has eased in recent months.

We note that momentum in house prices has only been significantly arrested in previous cycles with a rate hike.

With rates on hold (from our perspective) until late in 2015, there appears to be scope for at least maintaining current momentum in housing.

Note that the market has already received a "rate cut" in 2014 with some banks reported to have increased discounting on new loans in recent months.