Australian dollar out of gas as economy sputters

The Australian and New Zealand dollars barely budged on Wednesday as domestic economic data again disappointed, adding to market wagers that interest rates will have to be cut again and perhaps soon.

Figures showed Australia’s economy grew just 0.2 per cent in the first quarter, missing forecasts of 0.4 per cent and well below the previous quarter’s 0.6 per cent increase.

Analysts had already warned of downside risk after soft data early in the week, and there had even been talk the number could be negative, so the outcome was not a total shock.

With growth short of the Reserve Bank of Australia’s forecast of 0.5 per cent, the central bank will likely have to again downgrade its economic outlook.

The RBA has already responded by cutting rates in February and May, and even considered an outsized move in May as insurance against a tariff-induced global slowdown.

“While it’s still too soon to know for sure, early signs point to an even larger drag from confidence on consumption and investment in Q2,” cautioned Ben Udy, lead economist for Oxford Economics Australia.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

“The RBA will be watching closely for further signs that the weakness in activity extends into Q2 and, if that evidence continues to rack up, may opt to cut rates again in July, a little sooner than our current forecasts suggest.”

Markets imply an 80 per cent chance the RBA will ease by another quarter point to 3.60 per cent at its next meeting on July 8, though some analysts suspect it will instead choose to wait for first-quarter inflation figures due later in the month.

Investors seemed relieved the GDP report was not even worse and the Aussie held at US$0.6473, having fallen 0.5 per cent the previous session and away from resistance around US$0.6500. Support lies around US$0.6447 and US$0.6390.

The kiwi dollar was a fraction firmer at US$0.6006, after retreating 0.6 per cent on Tuesday and off a six-month top at US$0.6054. Support comes in around US$0.5930 and US$0.5850.

The Reserve Bank of New Zealand cut its rates a quarter point to 3.25 per cent just last week, and is far ahead of the RBA having eased by a hefty 225 basis points so far this cycle.

Markets are thus wagering it will skip another cut at its July meeting and imply around a 70 per cent chance of a move in August instead, which could be the last of the cycle. REUTERS