Positive surprise on GDP growth drives Aussie dollar up
- Australian GDP expectations were wide of the mark
- Quarterly growth was 1.1%, with a very healthy 3.1% year on year figure
- The chance of a rate cut from the RBA at next week’s policy review has slumped
- The smart money suggests the RBA will defer any rate cut until August
By Max McKegg
Australia was in the spotlight during the Asian trading session today as the nation’s first quarter GDP numbers were released. This update can usually be relied upon to provide some short term volatility in AUDUSD and command trader attention, at least until New York trading kicks off and the US dollar reacts to local data releases.
Expectations for Australia’s GDP centred around a quarterly advance in the 0.6% to 0.9% range, or about 2.8% year on year.
But as with the first quarter inflation update released in late April, forecasts were wide of the mark. The quarterly number came in at 1.1% to produce a very healthy 3.1% year on year. AUDUSD jumped from 0.7245 to 0.7295, short term rates rose, and the chance of a rate cut from the Reserve Bank of Australia at next week’s policy review slumped.
Today’s GDP release followed Tuesday’s overseas accounts update where the numbers were not so good. The current account deficit was shown to have widened to 5% of GDP, representing a marked deterioration. In days past, current account numbers had immediate impact on the Aussie dollar but now it seems to just another part of the jigsaw. Of note was the strong export receipts figures, which itself added 1.0% plus to quarterly GDP (and therefore hinted today’s number could surprise on the upside). The previous decade’s mining investment boom continues to pay dividends and illustrates how important the mining sector still is to Australia’s economy.
It could have been much better: as the chart below shows Australia’s term of trade (the price it receives for exports relative to prices paid for imports) have declined sharply over recent years. But high prices at a time of record production was perhaps too much to ask.
Australia's terms of trade
As noted by Reserve Bank of Australia in recent commentary, the exchange rate has been “adjusting” to the fall in the terms of trade over the last couple of years, thereby cushioning the impact. This suggests that commodity prices, rather than interest rate differentials, will be major determinant of AUDUSD over the medium term.
Nevertheless, central bank policies are likely to be impetus behind movements in the cross over the next fortnight. Next Tuesday the RBA’s Board convenes to discuss monetary conditions, and the Monetary Policy Statement they issued in early May will be still operative. The Statement’s downwardly revised inflation forecasts assumed “market pricing” over the next year or so, in line with the Overnight Index Swap curve (OIS) which bottoms out at around 1.40%. This implies a 100% probability of a 25 basis point to the RBA’s current 1.75% policy rate and some chance of a second cut.
The question is: when will the Bank move? The smart money suggests they will pass this time around and hold on until August when new forecasts will be available. Those forecasts will be drawn up in light of the second quarter inflation update due on July 27.
Of course, with AUDUSD there are two balls in the air; more specifically two OIS curves. The chart below shows the interest rate differential between AUD and USD is expected to narrow going forward as the RBA cuts rates and the US Federal Reserve goes in the opposite direction.
Today’s growth numbers showed Australia’s economy expanded faster than its non-inflationary potential over the first quarter. Theoretically then, we should be seeing signs of cost-push inflation. But, as is the case with the US, theory and practice aren’t lining up.
The positive surprise on GDP will encourage the Reserve Bank of Australia to sit on its hands at next Tuesday’s monetary policy review, holding the cash rate at 1.75%, but the post-meeting statement is unlikely to suggest they have changed their view on the weak inflation outlook. A rate cut in August still looks a good bet.
– Edited by Robert Ryan
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Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts an article or trade, then click here to follow him.