The Australian dollar jumped 0.5% against the US dollar to 0.754 within minutes of this morning’s release of better than expected GDP data.
The data, released by the Australian Bureau of Statistics, showed that Q1 GDP grew at 0.3% – slightly stronger than the forecast for 0.2% but a significant fall from growth of 1.1% in Q4 of last year. Today’s number puts annualized GDP growth in Australia at 1.7%.
Yesterday, after keeping interest rates on hold at 1.5%, the head of Australia’s central bank said that decision makers on the bank’s board would overlook low growth in Q1 – a development they had predicted after extreme weather caused havoc with the country’s coal and iron ore shipments. The bank’s governor said yesterday that “growth is still expected to increase gradually over the next couple of years to a little above 3%.”
Today’s jump in the Australian dollar is something of a relief rally. Although Q1 growth was only a fraction of that in Q4, it could have been so much worse. Indeed, a number of economists had revised down their forecasts for GDP following data yesterday which showed a much bigger decline in net exports than had been forecast.
The economic outlook for Australia has been deteriorating recently, following a tumble in iron ore prices and patchy economic data. The outlook has deteriorated so much that in recent weeks traders have begun making bets on a rate cut by Australia’s central bank sometime this year, although the probability of a cut remains low (roughly 20%, judging by derivatives pricing). Australia has joined Switzerland as one of only two advanced economies for which a rate cut is considered a possibility in 2017.
Today’s rally in the Aussie continues what has so far been a great week for the currency. Including Friday, the Aussie has gained in its last four sessions against USD and is on course to record its best four-day performance since March. Since Friday morning, AUD/USD is up 2.25% and climbing, and is 3% higher than its May lows.
The Australian dollar is perhaps better value against the New Zealand dollar, however.
The AUD/NZD exchange rate fell sharply in the eleven trading days between May 22nd and June 2nd – a move which took AUD/NZD losses to 6% from its 2017 highs recorded in mid-March. The rate found support in the significant 1.035-1.04 area and, as if to confirm its intentions, produced a strong bullish engulfing candle on Monday, June 5th. As of writing at 05:57 GMT on Wednesday, the Australian dollar has climbed to 1.05 versus its New Zealand cousin, but this puts the rate up only 1% since Friday, versus the aforementioned 2.25% gain in AUD/USD, and as such AUD/NZD may offer better value.
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