Australian retail sales rose in April by the most in 17 months as the economy recovered from its worst quarterly contraction in two decades, sending the nation's currency higher.

Sales advanced 1.1 percent from a month earlier, when they declined a revised 0.3 percent, the Bureau of Statistics said in Sydney today. That was the biggest jump since November 2009 and almost three times more than the median forecast in a Bloomberg News survey of 25 economists for a 0.4 percent increase.

The report boosted the local dollar as the surge in retail sales supported the central bank's forecast for the economy to accelerate after floods caused a 1.2 percent first-quarter contraction. Reserve Bank of Australia Governor Glenn Stevens convenes a meeting June 7 to weigh an increase in the benchmark interest rate of 4.75 percent, the highest in the developed world.

Eoin Treacy's view

My view - By late last year, Australian short-term interest rates had risen from 3% to 4.75% and are now equal to what had previously been considered highly accommodative in previous cycles. However in the current environment, the relative position of the rate rather than the absolute level is probably a better measure of how much monetary tightening has occurred.

Interest rate differentials between the Australian Dollar and the US Dollar, Canadian Dollar, British Pound, Euro and Swiss Franc have expanded to levels similar to those available prior to the financial crisis. This helps to explain the Australian Dollar's relative strength and supports the argument for it being able to hold some of the highest levels seen against the US Dollar for decades.

Against the US Dollar the Australian Dollar remains in a comparatively consistent medium-term uptrend. It hit a peak near $1.10 a month ago and remains in a period of consolidation and reversion towards the 200-day MA. A sustained move below $1 would be required to question medium-term upside potential.

The domestic Australian economy is struggling with the strength of the Australian Dollar, with manufacturing and tourism under some of the most pressure. The S&P/ASX200 remains largely rangebound and has fallen to test the lower side near 4500. A clear upward dynamic would be required to check the decline while a sustained move above 4700 would break the short-term progression of lower rally highs and suggest demand is returning to dominance beyond the short-term

The S&P/ASX 200 Financials has fallen to test the yearlong progression of incrementally higher reaction lows. Today's decline was perhaps exaggerated by National Australia Bank moving to Ex-Div but a clear upward dynamic will be required to indicate demand is returning in this area and to check scope for some additional downside.