FX comment – AUD gaps lower to below 0.84 after Q3 GDP disappoints

by: Roy Teo

  • AUD slumps after Q3 GDP disappoints
  • Implications for monetary policy and the exchange rate

AUD slumps after Q3 GDP disappoints

The Australian dollar was sold off sharply to below 0.84 after Q3 GDP print this morning was much weaker than market consensus. The Australian economy expanded by 0.3% qoq in Q3 against market expectations of 0.7%. Year on year terms, the economy grew 2.7% in Q3 with Q2 GDP revised lower from 3.1% to 2.7% yoy. The main detractors for the poor numbers in Q3 were gross fixed capital formation (-0.7pp). Looking at business confidence and company profits trends, we think that a sharp improvement in fixed investment is unlikely to materialise anytime soon.

Implications for monetary policy and the exchange rate

However disappointing, economic growth in the first 3 quarters of this year was 2.8% yoy, a sharp improvement from the 2% growth during the same period last year. We think that economic growth is likely to slow in the coming quarters before recovering in the second half of 2015. This is in line with the RBA’s outlook that GDP will remain below trend rate for some time. Hence we maintain our view that monetary policy will remain accommodative at current levels well into 2015. On the exchange rate, though we could see some profit taking in short positions in the AUD towards the end of the year, we think that any relief rally is likely to be limited towards 0.8545. We expect 0.83 to provide some support to the AUD in the coming weeks. Looking ahead, we continue to see a weaker AUD towards 0.78 in 2015.