Following on from moderate losses overnight, the Australian dollar has maintained an easing bias in the domestic session after the release of Q2 Gross Domestic Product came in just shy of consensus estimates. The Australian economy grew 0.6 percent in the second-quarter, slightly lower than estimates of 0.8 percent. In annual terms the economy grew 3.7 percent from the second-quarter last year – in line with estimates. Although healthy, the latest GDP print is the latest of a growing list of local macro data points suggesting the pace of growth is slowing, amid further signs China’s economy is coming off the boil.
After a solid post-RBA policy meeting performance yesterday, the Aussie dollar resumed its slow grind lower against the greenback overnight and today’s GDP release has reinforced its slow descent with the AUDUSD pair touching fresh six-week lows of 101.89 US cents. The local unit initially firmed after the Reserve Bank left interest rates unchanged at 3.5 percent with the ensuing statement taking a tad more of a neutral tone than markets had priced in. The statement acknowledged weakness from recent Chinese indicators, which is a delicate downgrade from the August statement which noted “China’s growth has moderated to a more sustainable pace, but does not appear to be slowing further.” The statement noted “growth in China remained reasonably robust in the first half of this year, albeit well below the exceptional pace seen in recent years. Some recent indicators have been weaker, which has added to uncertainty about near-term growth. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.” It also noted a firming of housing prices and business credit as a result of previous cash rate adjustments, of which have yet to fully infiltrate the broader economy. Little could be drawn from the brief mention of the recent fall in Australia’s key commodity exports, but continued to point out terms of trade have declined significantly “though they remain historically high”. Inflation is expected to be “consistent with the target over the next one to two years”. In essence, the statement justifies why interest rates are below their medium term averages, rather than a case for additional cuts to the official cash rate.
Nevertheless, a secession of negative themes continues to weigh on the local unit with a stronger greenback overnight also applying mild pressure. On balance, the data pulse in the U.S has been inconsistent with some bright spots in the economy overshadowed by sub-par growth in manufacturing. The ISM manufacturing released overnight showed the sector remains in contraction with the index falling to 49.6 in August from a previous 49.8. While this may add weight to the QE3 argument, the prices paid component of the index rocketed to 54 from a previous 39.5, suggesting inflationary pressures have once again infiltrated the broader economy given the recent spike in energy and grain prices. This alone may provide another reason for the Federal Reserve to sit on the QE3 sidelines when they meet next week, implying disappointment and a possible shift to the upside for the greenback at the expense of risk currencies. At the time of writing the Australian dollar is buying 102.1 US cents.