Australian Dollar Gains on GDP But Stock Drop Limits Upside (Euro Open)

The Australian Dollar pushed higher as the economy grew more than economists expected in the second quarter but failed to build meaningful momentum as stocks dropped nearly 2% in Asian trading, weighing down the risk-linked currency. Euro Zone GDP and UK Construction PMI are on tap in European trading hours.

Key Overnight Developments

• Australian Dollar Gains on GDP But Stock Drop Limits Upside
• Euro, British Pound Range-Bound in Overnight Trading

Critical Levels

The Euro was confined to a narrow range 35-pip range above 1.4190 in overnight trading. The British Pound followed suit, oscillating in a 60-pip band below 1.6180.

Asia Session Highlights

Australia’s Gross Domestic Product grew 0.6% in the second quarter, topping economists’ expectations of a 0.2% result. The annual pace of economic growth advanced to 0.6%, rebounding from the 18-year low of 0.3% in the three months to March. The details of the report appear encouraging: private consumption and investment both advanced, the former by the largest margin since the fourth quarter of 2007 and the latter by the most since the three months through September of last year. Still, the acceleration seems to be a testament to the effects of the government’s ample fiscal package, including A$20 billion in cash handouts to households and A$22 billion in infrastructure spending, and the big question going forward will be whether the economy can maintain momentum once the flow of stimulus cash dries up. The Australian Dollar surged 50 pips against its US counterpart in the hour following the release but failed to meaningfully build on that momentum as stocks dropped nearly 2% in Asian trading, weighing down the risk-linked currency. Indeed, a trade-weighted average of the Australian unit’s value is now 95.6% correlated with the MSCI World Stock Index.

Euro Session: What to Expect

The second revision of the Euro Zone’s Gross Domestic Product is set to confirm that the economy shrank -0.1% in the second quarter. The annual pace of contraction is expected to be revised slightly higher from -4.6% to -4.7%, but this is unlikely to be enough to stir the currency markets. Rather, traders will be looking at the expected upward revisions to the Household Consumption and Gross Fixed Capital components of the metric. An increasing number of market observers (ourselves included) are skeptical about whether the recent upswing in economic data around the globe is sustainable after the flow of government stimulus cash dries up. To this effect, measures of consumption and investment are going to be critical at this point in gauging whether a meaningful rebound in private demand can pick up where fiscal measures leave off.

In the UK, Construction PMI is set to rise to 48.0 in August from 47.0 in the previous month, showing that the industry shrank at the slowest pace in at least 13 months. However, the analogous metric for the manufacturing sector unexpectedly declined yesterday, suggesting rising unemployment may be starting to become a meaningful drag on leading indicators and opening the door for a downside surprise in today’s report.

Written by Ilya Spivak, Currency Analyst
Article Source – Australian Dollar Gains on GDP But Stock Drop Limits Upside (Euro Open)