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Australian Dollar to "Outperform" Peers Next Week, say Westpac, as Data Shows Economic Growth Rebounding in First-quarter

-Aussie business investment data points to faster GDP growth.

-Aussie GDP forecasts revised upwards at Westpac as a result.

-AUD has scope to outperform as growth picks up, say Westpac.

© Andrey Popov, Adobe Stock

The Australian Dollar has rebounded higher against its developed world rivals during the month of May and, according to strategists at Westpac Banking Corporation, the currency will likely continue to outperform its peers next week too.

Australia's Dollar caught a renewed and powerful bid over Wednesday and Thursday as fears over Italian politics faded and traders rotated back into so called risk assets like stocks, commodities and the Aussie. But it's the domestic growth story that's most likely to propel the currency higher next week. 

"Two of the three strongest G10 currencies in May are the Japanese yen and the Swiss franc. This makes sense for a month which produced turbulence in many markets. Yet the other outperformer is the Aussie. This should continue in the week ahead if Australia Q1 GDP is as firm as we expect," says Sean Callow, head of G10 FX strategy at Westpac.

Australia's first-quarter GDP number will be released next Wednesday at 02:30 am and markets are looking for a rebound from an earlier slowdown that saw Australian economic growth fall progressively from 0.8% in the second quarter of 2017, to 0.6% in the third and 0.4% during the final three months of the year. 

However, stronger-than-expected plant and equipment spending among Australian companies saw the Westpac economics team revise its forecast for GDP growth higher on Thursday. Westpac is now looking for GDP growth of 0.9% during the three months to the end of March 2018, which would mark the fastest quarterly expansion for the Antipodean nation since the final quarter of 2016.

"Even if there are some downside surprises in the partial data Mon and Tue that weigh on the actual GDP outcome, Australia should still report a faster quarterly growth pace in Q1 than e.g. the US, UK, Eurozone and Japan. Global volatility may persist, but so too could AUD outperformance on crosses," Callow adds.

Australian retail sales data for April is due next Monday, and so too are a range of other minor economic numbers before Wednesday, which means Westpac's revised forecast may yet prove to be too optimistic. However, such was the final quarter 2017 slowdown that it shouldn't be too tall an order for the economy to have picked up in 2018.  

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted 0.05% lower at 0.7566 Thursday while the Pound-to-Australian-Dollar rate was 0.07% higher at 1.7558 after markets shifted into risk-off mode during the noon session in response to the latest trade tariff announcement from the White House.

However, the Australian unit has risen by 0.47% against the greenback during May, a month where the US Dollar has outperformed against many of its developed world rivals, and has gained a notable 4.2% against a Pound Sterling that has come under renewed pressure of late. 

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

"It seems that AUD is finding support from the domestic growth and interest rate outlook and perhaps inbound direct investment. As the chart shows, the pipeline of publicly announced merger and acquisition inflow to Australia is close to 2 year highs. Any AUD demand from such deals will not be derailed by e.g. Italian political wrangling," says Callow. 

To the extent that faster economic growth helps markets to become more optimistic about the Australian inflation and interest rate outlook next week, the GDP data might mark a turning point for the Aussie. After all, interest rate differentials have been a major source of downward pressure on the currency in 2018.

The Reserve Bank of Australia has all but told markets it has no intention of raising the Aussie cash rate from its current record low of 1.5% for some time to come, while other central banks across the globe are gearing up to withdraw "stimilus" provided during the post-crisis years. 

This has seen Australian bond yields overtaken by those of their US counterparts. The yield-gaps between Aussie government debts and those of other developed world economies such as Canada, the UK and Europe have also narrowed and so the Aussie, which has typically been supported by higher interest rates, has come under increasing pressure.

"A big contribution from net exports and likely positive investment point to a growth pace that will fit policymaker optimism. This should at least stop the unwinding of pricing for RBA tightening, which has now been almost wiped out by end-2018," Callow says. 

Commodity prices, which are important for the Aussie Dollar because of the economy's reliance on exports of iron ore and liqified natural gas, were volatile in May but nonetheless continued their two-month long uptrend. And many economists expect a pickup in global growth during the rest of the year, which is good not only for commodity prices, but also sentiment toward so called risk currencies like the Australian Dollar.

"This suggests AUD gains on crosses and more [AUD/USD] trade near US$0.76 rather than under 0.75," Callow concludes. 

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