Fundamental Analysis: AUD Sinks on GDP Data

Fundamental Analysis: AUD Sinks on GDP Data

The Aussie dollar weakened dramatically in early trading today in the aftermath of a much worse GDP figure. Weaker data from Australia’s key trade partner China has also played a role.

AUDUSD tanked this morning to nearly 70 US cents, a low of more than two months. The euro also reached 2019 highs against the Aussie dollar over A$1.60. Meanwhile AUD declined significantly below ¥79.

Per capita recession in Australia, but there’s some support

This morning’s release of quarterly GDP from Australia at 0.2% was less than half of the expected figure and lower even than the last number. News in Australia pointed to this being the second consecutive quarter in which the country’s economy has contracted as measured per capita.

If the effects of population growth are removed from the percentage of GDP growth, Australia’s economy shrank by 0.2% in the fourth quarter of 2018 and 0.1% in Q3. These statistics are highly negative for the Aussie dollar.

Chinese data yesterday morning also generated a degree of downward pressure for AUD. Caixin service PMI for February indicated lower than expected service activity, which at 51.1 is close to stagnation. This limited to some extent positive sentiment after the RBA’s meeting because of Australian exports’ high reliance on Chinese growth.

Yesterday morning’s meeting at the Reserve Bank of Australia was not as dovish as some had expected. In fact, the central bank reiterated that stable monetary policy remains the best way to meet targets for inflation. There was no indication that governor Philip Lower’s recent pessimism might lead to a cut in the cash rate in 2019 or 2020 as some had hypothesized.

Shares are also giving some support to AUD to the extent of limiting fundamentally driven losses. The S&P/ASX 200 index continued its vivid upward movement this morning, closing today above 6,245. This is the highest closing price since September last year.

Critical retail data tomorrow

The most important economic data in the rest of the week for AUD is retail sales for January. The Australian dollar is likely to be very active around the release tomorrow morning at 00:30 GMT. The consensus suggests a return to growth after the unusually poor -0.4% in December.

Traders will also be watching trade data tomorrow morning. Imports and exports which declined in December might provide fuel for a bounce by AUD if the figures are positive. Finally there’s Australia’s trade balance - analysts predict that this will remain positive although lower at around A$3 billion.

Oversold AUD might bounce

Although this morning’s news was certainly negative, the aggressive selling of AUD is excessive. If tomorrow morning’s releases are broadly in line with expectations, a limited recovery or at least stabilization for the Aussie dollar in most of its pairs is the most likely outcome in the next couple of days.

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