US Markets

Australia dlr falters as downbeat GDP fuels rate cut bets

Credit: REUTERS/DANIEL MUNOZ

The Australian dollar slipped from three-week highs on Wednesday after disappointing domestic data underlined expectations for additional rate cuts and offset more upbeat economic news from China.

By Wayne Cole

SYDNEY, Dec 4 (Reuters) - The Australian dollar slipped from three-week highs on Wednesday after disappointing domestic data underlined expectations for additional rate cuts and offset more upbeat economic news from China.

The Aussie eased back to $0.6835 AUD=D3, from an overnight top of $0.6862, though it still held gains of 1.1% for the week so far. Chart support now comes in around $0.6815.

The New Zealand dollar had no such problems and held firm at $0.6512 NZD=D3, just a whisker from a four-month peak and 1.4% higher for the week.

Sentiment was supported by a private survey showing activity in China's giant service sector picked up to a seven-month high in November.

Restraining the Aussie were figures showing the economy grew a sub par 0.4% in the third quarter, missing forecasts and down from 0.6% the previous quarter.

That was unwelcome news for the Reserve Bank of Australia (RBA) which had hoped for growth of 0.7% to support its argument that the economy had reached a turning point.

It also challenged the government's insistence that tax rebates launched in July would be enough on their own to get consumers spending again.

Instead, households chose to save the money and consumption grew at the slowest pace since the global financial crisis. They have also used the RBA's three rate cuts since June to pay down debt faster and build equity in their homes.

"The RBA has been characterising the economy as experiencing a "gentle upturn", but this data seems to suggest more of a gentle downswing," said Robert Carnell, chief economist for Asia-Pacific at ING.

"As long as the forthcoming labour data don't change the picture, then we will be looking to reduce our rate outlook to 0.25% for the end of 2Q20, and most likely scaling back our AUD forecasts too."

While the RBA is on hold until its next meeting in February, markets are wagering it will be forced to cut rates a quarter point to 0.5% by May at the latest.

Investors also narrowed the odds on a further move to 0.25%, in part because the latest flare up in Sino-U.S. trade tensions has threatened a fledgling recovery in global manufacturing.

Rate futures for November next year climbed 6 ticks to 99.600 0#YIB:, implying a 40% probability of a cut compared to just 16% on Tuesday.

Australian government bond futures also rallied, with the three-year bond contract YTTc1 rising 6.5 ticks to 99.295.

The 10-year contract YTCc1 jumped 11 ticks to 98.9150, implying an yield of 1.085%.

(Editing by Shri Navaratnam)

((Wayne.Cole@thomsonreuters.com; 612 9321 8162; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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