Aussie shrugs off soft GDP

The Australian dollar is showing limited movement for a second successive day. In European trade, AUD/USD is trading at 0.6696, up 0.12%.

Australia’s GDP misses forecast

Australia’s economy underperformed in Q3, with a modest gain of 0.6% m/m. This was lower than the Q2 print of 0.9% and beneath the 0.7% consensus and also marked the weakest quarterly growth this year. Annualized GDP climbed 5.9%, an improvement from 3.6% in Q2 but shy of the consensus of 6.2%. The RBA is projecting that GDP will continue to slow through to 2024. The economy is showing clear signs of slowing down. Services, manufacturing and construction PMIs are all in decline. There was more bad news this week – Current Account for Q3 showed a deficit for the first time since 2019 and Company Operating Profits fell by 12.4% in the third quarter.

Household spending remains strong, but high inflation continues to erode savings and consumers will have no choice but to cut back on spending at some point. Inflation has been more persistent than the RBA anticipated, and Governor Lowe has reiterated that inflation is a “scourge” that must be defeated. The RBA would prefer to avoid a recession, but it will be a tricky task to guide the economy to a soft landing.

The RBA raised rates by 25 bp on Tuesday, bringing the cash rate to 3.10%. The move was widely expected. As a result, the Australian dollar showed a muted response. There was little of note in Governor Lowe’s rate statement, which was almost identical to the November statement. Lowe noted that the RBA expects to increase rates, but “is not on a pre-set course” and rate decisions would be data-dependent. This last point may seem obvious, but events such as consumer spending, employment and inflation will be key drivers which determine rate policy in the early part of 2023.

There is a great deal of uncertainty as to the terminal rate, with forecasts ranging from 3.3% all the way to 3.8%. This means there is some life left in the current rate cycle, and there is a strong possibility that the RBA will deliver another 25 bp hike at its next meeting in February.

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AUD/USD Technical

• AUD/USD tested support at 0.6676 earlier. Next, there is support at 0.6558
• There is resistance at 0.6760 and 0.6878

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