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Australian GDP Helps Fuel Recovery in Risk FX

Boris Schlossberg, Director of Currency Research, GFT

Top Stories

  • Australian GDP beats big
  • EZ GDP in line
  • Nikkei up 1.81% Europe up 2.31%
  • Oil at $85/bbl
  • Gold at $1636/oz.

Overnight Eco

  • AUD Gross Domestic Product (QoQ) (1Q) 1.3% vs. 0.5%
  • EUR Euro-Zone Gross Domestic Product s.a. (QoQ) (1Q P) 0% vs. 0%
  • EUR European Central Bank Rate Decision n/a
  • EUR German Industrial Production s.a. (MoM) (APR) n/a
  • GBP Purchasing Manager Index Construction (MAY) 54.4 vs. 54.5

Event Risk on Tap

  • USD Fed's Lockhart Speaks on Economy in Florida
  • USD Non-Farm Productivity (1Q F) Expected at -0.6%
  • USD DOE U.S. Crude Oil Inventories (JUN 1)
  • USD Fed Releases Beige Book Economic Survey

Price Action

  • USD/JPY above 79.00
  • AUD/USD rises to 98.70 off good GDP data
  • GBP/USD quite at 1.5460
  • EUR/USD above 1.2500 ahead of ECB

Better data from Australia and hope for some action from EU leaders helped to lift risk FX in early morning European trade today with EUR/USD rising above the 1.2500 barrier while Aussie climbed above .9850 rising more than 100 points on the day. Currencies were also helped by strong performance from the equity markets with European bourses rising by more 2% while Nikkei gained 1.81% as investor sentiment improved markedly.

In Australia the GDP expanded at twice the expected rate surprising markets and easing concern about the recent slowdown in economic activity in the region. First quarter GDP rose by 1.3% versus 0.5% eyed as boom in mining offset slowdown in services and manufacturing. BHP Billiton has nearly $500 Billion of projects in the pipeline providing massive stimulus to the Australian economy.

The news helped to quell speculation for any additional rate cuts by the RBA after the central bank reduced the benchmark rate by another 25bp to 3.50% this Tuesday. However, focus will turn to tomorrow’s employment data as trader try ascertain the actual extent of the slowdown in Australian economy. Last month’s numbers recorded a gain of 15.5K but analysts expect a gain of only 0.9K this month.

If the employment data from Australia once again surprises to the upside, the news could fuel a vicious short covering rally in Aussie with longs trying to push the pair back through the key 1.000 barrier. The unit has been battered over the past several months on the assumption that Australian economy  was destined to contract this year in the wake of serious slowdown in China. However, if the data proves surprisingly resilient those best could be quickly unwound.

In Europe today the focus will be on the ECB meeting with markets generally anticipating no change on the interest rate front. Last month Mr. Draghi was unabashedly hawkish even as economic data in the began to deteriorate. With EZ now on the precipice of a recession   it will be interesting to see if the ECB ameliorates its stance signaling a possible rate cuts in July and additional  LTRO actions to help recapitalize  the regions trouble banking sector.

If Mr. Draghi changes his tone, the EUR/USD could see an initial sell off, but the downside may be limited in traders view the actions as ultimately positive for growth and therefore helpful to risk assets.  


FX Upcoming

Currency GMT EST Release Expected Prior
USD 12:15 8:15 Fed's Lockhart Speaks on Economy in Florida
USD 12:30 8:30 Non-Farm Productivity (1Q F) -0.6% -0.5%
USD 14:30 10:30 DOE U.S. Crude Oil Inventories 2213K
USD 18:00 14:00 Fed Releases Beige Book Economic Survey