Strong Aussie Data To Encourage RBA

GDP Soars In Q4

Real GDP was seen having grown at 1.1% quarter on quarter in Q4 2016 after falling 0.5% in Q3. Year over year GDP growth rose to 2.4% from a revised 1.9% in Q3. The strong pickup in growth is linked to better domestic demand, which rose 1.2% quarter on quarter. Public sector spending improved and contributed 0.4% to the headline reading, up from -0.4% in the prior quarter.

Private sector spending also increased to 0.7%. Part of the public sector spending was linked to defense spending and both central and state spending improved as the drag from the election-linked hiatus in 2016was removed. Private consumption growth also improved to 0.5% quarter on quarter in Q4, fueled by stronger full-time jobs growth. However, weakness in wage growth is likely to remain a challenge to consumption in 2017.

Investment grows at its strongest pace since 2012

Notably, business investment turned positive for the first time in nine quarters, growing at 0.9%. Residential investment saw a slight turnaround, growing 1.2% quarter on quarter. While residential investment poses some uncertainty, it should still provide support for activity given the divergent trends. The recent uptick in investor loans for housing indicates a pickup in housing demand though it is unclear whether this can be sustained.

Nominal GDP Outgrows Real GDP

Net exports contributed 0.2% to quarter on quarter growth in Q4 led by a boost in exports. Earlier in Q4, the positive terms of trade surprise aided an improvement in corporate profitability. Mining exports are likely to continue to fuel export growth, even as mining returns to pre-boom levels.

Australian Account Deficit Shrinks in Q4

The Australian current account deficit saw a sharp contraction in q4 last year falling to a seasonally adjusted AUD3.85bln. This marks a significant shift from a year prior when the deficit was AUD23.1bln. The deficit is now at its lowest level since Q3 2001.Furthermore, following the rise in commodity prices and a subsequent improvement in Australia’s terms of trade as a percentage of GDP, the current account deficit is now tracking around its lowest levels since the 1980s.

The large improvement in Australia’s current account position is largely linked to the swing in the goods and services balance which is now back in surplus. Goods, particularly non-rural goods such as coal, metal ores and mineral fuels, are now leading the way following the surge in commodity prices and robust volume growth.

RBA To Remain on Hold

Regarding monetary policy, the pickup in growth, low wage growth and improving profitability are likely to see the RBA remain on hold despite the recent rally in commodity prices. Markets are now pricing the RBA to stay on hold until December and are pricing a 53% chance of a hike in February 2018. Importantly, the RBA is likely to remain data dependent, and its tolerance of subdued underlying inflation appears to be quite high following its cuts in May and August of last year.

China PMI Rises in February

Adding further support for the Aussie is the recent uptick in China data. The official Chinese Manufacturing PMI rose to an unexpected 51.6 in February from 51.3 in January, beating the market consensus of 51.2. The Caixin PMI also rose to 51.7 in February from 51 in January. Both indicators are now clearly pointing to momentum. Core activity data over January and February have combined to smooth out distortions from the Lunar new year holidays which tend to occur each year.

[Infographics] Historical Overview: What Does China Mean To Australian Economy?

Technical Perspective

Having broken the rising trend line from last year’s lows, AUDUSD has now traded all the way back up to just shy of the November high, finding resistance at the bearish trend line from last year’s highs. A breach of this trend line and the November high will be needed to pave the way for a fresh run higher while a reversal lower here targets the channel support line around the year to date low.