Australian dollar unsettled by trade fears, soft GDP data

[SYDNEY] The Australian and New Zealand dollars ran into turbulence on Wednesday as renewed concerns about the risk of a global trade war spooked investors, while a soft reading on Australian economic growth added insult to injury.

The Aussie dollar lapsed 0.4 per cent to US$0.7795, having been as high as US$0.7842 at one stage overnight. Its kiwi cousin fared better to hold at US$0.7295, after reaching a top of US$0.7311.

Both currencies had bounced on Tuesday when South Korea said it would hold its first summit with the North in more than a decade, reducing geopolitical tensions.

Yet they ran into selling in early Asian hours after a key advocate for free trade in the White House resigned, fanning fears President Donald Trump would go ahead with tariffs and risk a trade war.

Australia is an open economy that relies heavily on commodity exports and stands to be a major loser in such a war.

Reserve Bank of Australia (RBA) Governor Philip Lowe was moved to call the proposed tariffs "highly regrettable and bad policy", strong words for a typically sober policy maker.

The economy could do without such headwinds as data out Wednesday showed growth had already slowed late last year.

Gross domestic product (GDP) rose a tepid 0.4 per cent in the December quarter, while the annual pace braked to 2.4 per cent from 2.9 per cent.

The futures market reacted by further pushing out the timing of any rate hike.

A move by August is now seen as just a 6 per cent chance, while December is at 42 per cent.

A rise to 1.75 per cent is not fully priced in until May next year, compared to February just a week ago.

"The Australian economy closed out 2017 in a lukewarm fashion," noted Gareth Aird, a senior economist at CBA.

"Rates will stay on hold until wages growth and core inflation are on a sustained upward trend," he added. "That still looks to be some way off so the cash rate should stay anchored at a record low for most of the year." Australian government bond futures firmed on the data, with the three-year bond contract up 3.5 ticks at 97.915.

The 10-year contract added 2.5 ticks to 97.2200.

The New Zealand dollar was untroubled by major economic data and managed to hold most of its overnight rally.

"The NZD jumped...on headlines out of South Korea that North Korea was ready to hold talks with the US on denuclearisation," said Sharon Zollner, chief economist at ANZ Bank.

"The potential for disappointment seems fairly high based on historical experience but in the meantime risk appetite got a boost and the NZD jumped aboard." Investors largely ignored an auction for dairy, the country's largest goods export, which showed prices had slipped 0.8 per cent.

REUTERS