AUD underperforms as risk off mood envelops markets

Daily Currency Update

The Australian dollar underperformed through trade on Monday giving up early morning highs near US$0.68 and sliding back toward session lows marginally above US$0.67. Domestic GDP markers cast a pall over the local session dampening analysts’ expectations for today’s Q2 GDP print. The current account contracted sharply led by declines in key commodities as iron ore prices continue to languish below $100 a tonne. The iron ore price collapsed this year, down by 32% amid persistent concerns about the Chinese property market and a depressed demand for steel. As markets prepare for a Fed rate cut, softness across iron and copper continues to act as a headwind buffeting AUD upside. Having slipped below US$0.6750 the AUD continued to track lower overnight amid elevated risk aversion. Global equities came under pressure and US treasury yields edged higher following a marginally stronger than anticipated US ISM manufacturing print. The AUD opens this morning buying US$0.6708.

Our attention turns to Q2 GDP numbers. We expect quarterly growth to be a miserly 0.2% Q/Q prompting a further slowdown in the annual pace of growth and a dip toward 0.9%. However, if we remove the impacts of migration the Australian economy remains mired in a recession equal to that of the early 90’s. That said today’s print will have little impact on RBA projections and given the softness has been well forecast we expect it to have a marginal effect on AUD performance. Offshore the Bank of Canada is expected to cut rates while US jobless claims will prove key in shaping expectations ahead of Friday’s all-important non-farm payroll print.