Australia: Solid Q1 GDP to reinforce the fundamental support for AUD – Westpac

Sean Callow, Research Analyst at Westpac, suggests that a solid reading on Australia’s Q1 GDP data would reinforce the fundamental support for AUD outperformance we have seen in recent weeks, even if AUD/USD has been notably stable.

Key Quotes

“The Australian dollar’s place as the second strongest G10 currency over the month is less obvious. It is not as though AUD is now a safe haven. We saw that again last week as AUD/USD hit 2 week lows under 0.7500 when global equities tumbled and Italian bonds crashed on fears of snap elections, only to rebound to near 0.76 as an Italian government deal took shape and global risk appetite rebounded.”

“Instead it may be that AUD is finding support from the domestic growth and interest rate outlook and perhaps inbound direct investment.”

“AUD’s domestic story is also broadly positive – at least in relative terms, which is of course what matters for currencies. The RBA has made clear that it expects the next move in the cash rate to be up, so long as its forecasts are broadly accurate. Markets price a steady hand as 100% chance on Tuesday and it is hard to see much market reaction to the wording of the statement.”

“Markets are more focused on Australia’s Q1 GDP data on Wed, which could please the RBA. Last week’s business investment survey showed a stronger than expected 2.5%qtr rise in Q1 plant and equipment spending, causing our economics team to raise its GDP forecast to 0.9%qtr, 2.8%yr. The median forecast on Bloomberg is 2.7%yr.”

“Even if there are some downside surprises in the data Mon and Tue (company profits, inventories, net exports etc) that weigh on the actual GDP outcome, Australia should still report a faster quarterly growth pace in Q1 than e.g. the US, UK, Eurozone and Japan. This would reinforce the fundamental support for AUD outperformance we have seen in recent weeks, even if AUD/USD has been notably stable. AUD/USD has closed with a 0.75 handle every day since 15 May (13 sessions and counting).”

“As always, swings in US dollar sentiment are a risk. But the market response to the US May employment report on Friday suggests that it would take a lot to upset market pricing for the Fed.”