Fourth Quarter GDP Acceleration Boosts Australian Dollar

Resilient Fourth Quarter Growth Lifts Australian Dollar Demand

While market risk appetite remained muted the Australian Dollar found a fresh leg up with the release of the fourth quarter Australian gross domestic product report. As growth proved stronger than forecast on the year, accelerating from 1.8% to 2.2%, this helped to ease lingering worries over the domestic economic outlook. Although global growth still looks set to weaken as a result of Covid-19 this was not enough to dampen the mood of AUD exchange rates yesterday.

With forecasts pointing towards a narrowing of the trade surplus in January, though, support for the Australian Dollar could easily diminish this morning.

Small UK Services PMI Downgrade Dents Pound

A slight downgrade to the finalised UK services PMI limited the appeal of the Pound during Wednesday’s European session. While the survey still points towards a solid month of activity for the service sector this failed to ease growing anxiety over the outlook of the wider UK economy. Increasing bets that the Bank of England (BoE) could deliver an emergency interest rate cut also weighed heavily on GBP exchange rates.

Comments from outgoing BoE Governor Mark Carney may stir further jitters for the Pound in the near future.

Fears of Italian Slowdown Weigh on Euro

Modest downward revisions to the Eurozone manufacturing and services PMIs saw the Euro stumble as anxiety over the health of the currency union continued to mount. Confirmation that the Italian economy slipped into a state of contraction in the fourth quarter also put pressure on the single currency. With Italy looking at risk of a recession in the face of a rising number of Covid-19 cases investors remain wary of the potential for a wider slowdown, leaving the Euro on the back foot.

A strong month for the German construction PMI is unlikely to be enough to offer EUR exchange rates any significant rallying point.

US Dollar Recovers Ground as Impact of Fed Rate Cut Fades

In the wake of the Federal Reserve’s surprise decision to cut interest rates support for the US Dollar started to show signs of recovery. While the central bank’s move wrong-footed markets USD exchange rates returned to a positive footing overnight, boosted by a stronger-than-expected ISM non-manufacturing composite index. Fresh signs of resilience within the service sector helped to restore demand for the US Dollar, even though doubts over the results of the Fed rate cut remained.

However, USD exchange rates may falter once again overnight if January’s US factory orders data declines as anticipated.

Sharp BOC Interest Rate Cut Drives Canadian Dollar Lower

Support for the Canadian Dollar weakened as the Bank of Canada (BOC) delivered a larger interest rate cut than anticipated last night. While markets had anticipated a rate cut in the wake of the Fed’s surprise move the extent of the 50bpt cut saw CAD exchange rates trending lower. With the BOC expressing increased concern over the likely economic impact of Covid-19 there appeared little reason for investors to favour the Canadian Dollar.

Further comments from BOC Governor Stephen Poloz could put additional pressure on CAD exchange rates tonight.

New Zealand Dollar Shakes off Global Growth Worries

While global anxiety over the spread of Covid-19 lingered this was not enough to knock the New Zealand Dollar yesterday. NZD exchange rates instead benefitted from the general loosening in global monetary policy, capitalising on the relative weakness of the US Dollar.

Even so, as long as global growth looks set to falter in the face of the ongoing outbreak any further New Zealand Dollar gains could prove limited.

Data Releases

March 5th 10:30 AUD Trade Balance (JAN) 4.8 billion
March 5th 18:30 EUR Germany Construction PMI (FEB) 54.2
March 6th 01:00 USD Factory Orders (JAN) -0.1%

Louisa Heath