AUD/USD Rallies To Yearly Open Ahead Of FOMC Rate Decision

AUSTRALIAN DOLLAR FUNDAMENTAL FORECAST: NEUTRAL

  • AUD climbed as much as 5% against USD, despite contraction in 1Q GDP possibly ending a historic period of economic expansion.
  • The Federal Reserve rate decision and press conference on the 11th of June headlines the economic docket.

It’s safe to say the Australian Dollar had a breakout week, exploding through the February highs and pushing back above the psychologically imposing 0.70-handle for the first time since the 1st of January. Benefiting from the weakness seen in the US Dollar over the past week of trade, the AUD soared as much as 5% from the monthly open (0.6656).

Although the “Australian economy is experiencing the biggest economic contraction since the 1930's,” Reserve Bank of Australia (RBA) Governor Philip Lowe believes it’s “possible that the depth of the downturn will be less than earlier expected." However, with GDP contracting 0.3% in the first half of 2020, Australia looks to be heading for its first recession since 1991.

As household consumption falls to the lowest reading since the fourth quarter of 2008 (-1.1%), it is evident that without the fiscal support provided from the Australian government, through the JobKeeper and JobSeeker initiatives, GDP would have registered a contraction of 0.7%. With these initiatives set to expire in September, and households contributing over 50% to GDP, the return of consumer spending and confidence will be pivotal to an economic recovery.

GDP growth

Trade may become a contentious issue in the coming week, as the Morrison government continues to aggravate Beijing through the implementation of new foreign investment laws. With Australia being one of the more China-dependent economies in the world, a breakdown in this pivotal relationship could be disastrous. Retaliation from Beijing could threaten the recent surge in AUD, with the implementation of further tariffs on Australian agricultural and mining products, possibly reversing the ground gained by the risk-sensitive asset.

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