Australian Dollar Dominates Despite Dovish RBA Outlook, Though GDP Report Could Disap

The Australian dollar dominated on Tuesday, rallying more than 1 percent against the US dollar, despite the fact that the Reserve Bank of Australia (RBA) left rates unchanged at 3 percent, as expected, and left the door open to further rate cuts due to downside inflation risks. Tonight, though, the Australian Bureau of Statistics is projected to report that the Australian economy contracted again by 0.2 percent during Q1 from the previous quarter, while the annual rate of growth is forecasted to have fallen by 0.4 percent, the first decline since Q4 1991. The RBA noted this contraction in their recent policy statement, but also said that “considerable economic policy stimulus in train in most countries is helping to contain the downturn,” and saw the clearest evidence of a turnaround in China. Nevertheless, RBA Governor Glenn Stevens said that “the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy,” and that the Board will “continue to monitor how economic and financial conditions unfold.” That said, growth numbers will be important to watch in coming months as a gauge of the RBA’s policy bias, and if the Q1 GDP results prove to be disappointing, the Australian dollar could fall on future rate cut expectations. On the other hand, signs of resilience in the Australian economy could add further strength to the currency.