AUD/USD Sharply Higher after First Quarter GDP Beats Expectations

The AUD/USD climbed to .7298 before settling at .7273, up 0.0042 or 0.58%, after Australia’s first quarter GDP beat expectations. The nation’s economy grew 3.1 percent (YoY) in the first quarter of 2016 versus 2.8 percent expected and 2.9 percent in the fourth quarter (4Q) of 2015. This was the fastest pace of yearly expansion since the third quarter of 2012.
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The report also showed that quarter-over-quarter, Australia’s gross domestic product decreased 1.1 percent in the 1Q versus 0.8 percent expected and 0.7 percent in the 4Q. This marks the fastest pace of quarterly expansion since the 1Q of 2012.

The healthy GDP figure gives the Reserve Bank of Australia (RBA) room to wait to see whether inflation picks up before deciding if another rate cut is needed. In May, the RBA reduced the cash rate to a record low 1.75%, citing disturbingly low inflation. Investors are now giving a mere 6% chance of a follow-up cut next Tuesday from about a 75% chance just after the May cut.

The New Zealand Dollar strengthened against most major currencies in the Asian session on Wednesday. The NZD/USD rose to more than a 2-week high of .6812, before settling at .6782, up 0.0021 or +0.31%.

Upside momentum created by Tuesday’s positive data from New Zealand along with strong GDP data from Australia on Wednesday boosted the New Zealand Dollar and Australian Dollar although gains were limited by support for the US Dollar.

Boosting the Kiwi on Tuesday was positive data showing the ANZ business confidence index for New Zealand increased to 11.3 this month, a jump from April’s reading of 6.2.

Falling global equity prices drove investors into the Japanese Yen, helping to pressure the USD/JPY on Wednesday. The Forex pair close at 110.574, down 0.149 or -0.13%. The range was limited, however, and volume appeared to be below average.

The Japanese Yen is primarily a funding currency. When there is increased demand for risk, investors borrow in Yen to invest in risky assets like stocks. This puts downside pressure on the Yen. When stocks sell off, these investors have to buy Yen to pay back the loans. We are currently experiencing that refunding cycle ahead of Friday’s U.S. Non-Farm Payrolls report.

In other news, Japanese capital expenditures accelerated in the first quarter from the prior three-month period, suggesting gross domestic product growth could be revised up, but analysts remain wary about the outlook given growing pressure on corporate earnings.

The EUR/JPY posted a small loss during the Asian session on Wednesday, finishing at 122.976, down 0.273 or -0.22%. Volume and volatility were below average, leading to the formation of a tight trading range. The lack of fresh major economic data helped limit the price action.