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Australia dollar jumps, bonds retreat after GDP stunner

Wednesday, June 1, 2016 - 11:09
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The Australian dollar powered up on Wednesday after economic growth easily beat expectations, prompting investors to further scale back expectations for an interest rate cut soon.

[SYDNEY] The Australian dollar powered up on Wednesday after economic growth easily beat expectations, prompting investors to further scale back expectations for an interest rate cut soon.

The Australian dollar climbed as far as US$0.7294 from US$0.7233 in early trade and pulling further away from a three-month trough touched last week.

It was last at US$0.7284 with resistance around US$0.7325.

Australia's economy grew by 1.1 per cent in the first quarter, marking a remarkable 25 years without a recession, data showed earlier in the day.

Annual growth of 3.1 per cent far exceeded most developed nations including the United States, which last week reported annualised growth of 0.8 per cent in the first quarter.

"There is a growing disconnect between economic activity - which is improving - and inflation, which remains below the Reserve Bank of Australia (RBA)'s comfort level," said Aberdeen Asset Management senior investment manager Jasmin Argyrou.

"Against this solid economic backdrop monetary easing will be very gradual and it could be a long time between cash rate cuts." Interbank futures imply a 50-50 chance of a cut to 1.5 per cent by August, from 60 per cent on Tuesday, and are no longer fully priced for a move over the next 18 months.

The central bank holds its monthly policy review on June 7 and the market is widely expecting rates to be on hold following last month's cut.

Australian government bond futures fell, with the three-year bond contract off 3 ticks at 98.350, having touched its lowest in one-month. The 10-year contract shed 2.5 ticks to 97.6750, while the 20-year contract was 1 tick lower at 97.0900.

The New Zealand dollar was trading higher at US$0.6785 after getting a lift from better-than-expected first quarter terms of trade data.

New Zealand's terms of trade rose 4.4 per cent in the first quarter, data from Statistics New Zealand showed on Wednesday. Economists had been expecting a fall of 0.2 per cent, according to the median in a Reuters poll. The stronger-than-expected number was largely due to a sharp fall in oil product import prices.

OM Financial Limited Foreign Exchange and Derivatives senior client advisor Stuart Ive said the lift in the Kiwi was likely to be short-lived, given that oil prices have been recovering steadily. He said traders are now focused on Australia and China data due later in the global trading day.

New Zealand government bonds eased, sending yields 1.5 basis points higher across the curve.

REUTERS