GDP surprise helps steer Aussie dollar away from one-year low

The Australian dollar regained some ground, but was still dangerously close to a one-year low after economic output for the September quarter contracted by far less than feared amid growing signs of recovery in activity after months of lockdown in parts of the country.

The Australian dollar rose 0.3 per cent to US71.54¢ on Wednesday, not far from a one-year low of US70.63¢ hit on Tuesday. The currency skidded 5.2 per cent in November, the largest monthly drop since the pandemic started.

Data released by the Australian Bureau of Statistics on Wednesday showed the gross domestic product fell 1.9 per cent in the July to September period in the third largest quarterly fall after a 7 per cent slide in the June quarter of 2020 and a 2 per cent drop in 1974. Forecasts centred on a 2.7 per cent decline.

“The headline number is ugly,” said CBA head of Australian economics Gareth Aird. “But the fall in output was a decent result all things considered.”

Mr Aird argued the fact that the economy “only” shrank by 1.9 per cent indicated businesses adapted over the lockdown and kept production running.

The big contraction in output over the quarter was largely consumer led, with household spending plunging by 4.8 per cent over the quarter and detracting 2.5 percentage points from growth. But since then, consumer spending has bounced and retail sales vaulted 4.9 per cent in October as lockdowns ended.

“We believe the outlook is bright, with early evidence for the December quarter very encouraging, notwithstanding some anxiousness around the discovery of the omicron variant,” said Mr Aird.

The view is shared by AMP senior economist Diana Mousina: “We expect that the higher inflation data over the next few quarters along with solid economic growth will allow the RBA to start raising interest rates at the end of 2022.”

The Reserve Bank of Australia holds its last policy meeting for the year on December 7 and is seen as certain to leave the cash rate at a record low of 0.1 per cent. The central bank does not expect to raise rates before late 2023, at the earliest, if not 2024.

Bond yields rose after the GDP numbers, with the three-year government bond at 0.94 per cent, from 0.897 per cent, and the 10-year at 1.739 per cent, from 1.727 per cent.

Interbank futures are fully pricing a tightening in July, unchanged from before the data. Economists, however, believe the timeline is too aggressive but still anticipate a move well ahead of the RBA’s guidance.

Other data released by CoreLogic on Wednesday showed home prices rose 1.3 per cent in November, taking property values up 22.2 per cent over the past year.

AMP Capital chief economist Shane Oliver said housing price growth was expected to slow to 5 per cent in 2022 and between 5 per cent to 10 per cent in 2023, due to factors including more property sellers, higher mortgage rates and banks tightening lending standards.

The Australian dollar had been held hostage after US Federal Reserve chairman Jerome Powell on Tuesday indicated a faster tapering of bond purchases and conceded that inflation could no longer be considered “transitory”.

The sudden change of rhetoric for the Fed chief rattled markets on worries that a hasty tightening could derail a fragile economic recovery. Investors rushed to safe haven assets and sold the Australian dollar.

“The upside is difficult for the Australian dollar when you’ve just had Powell virtually brushing aside the notion that omicron would have an impact on the December FOMC decision, indicating that it was quite likely that the tapering will speed up and that ‘transitory’ is no longer the adjective of choice,” said Westpac senior currency strategist Sean Callow.

Mr Callow expects the Australian dollar to find support in the US70¢ to US70.50¢ range before extending losses.

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