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The Australian Dollar is outperforming following the release of a consensus-beating economic growth report.
The Aussie was bid after the ABS said Australia's economic growth rate accelerated in the June quarter, growing 0.6%, as household spending surprised to the upside, improving the near-term growth profile.
The outcome beat the market's expectations. "This was the first time since the March quarter 2023 that GDP per capita grew on an annual basis," says a response from economists at Westpac, one of Australia's largest banks.
The upside came on the back of stronger than expected consumer spending, which lifted 0.9% on the quarter.
"Where does Aussie belong now? Our answer is higher," says Deutsche Bank, adding that the currency is still "trading at a discount relative to fundamentals."
After experiencing the largest fall on record coming out of COVID, household incomes stabilised in 2023 and have been steadily recovering since then.
"The triple headwinds of bracket creep, surging prices and higher interest rates have subsided with tax and interest rate cuts now supporting disposable income growth," says Westpac.
Annual household disposable income growth hit 4.1% year-on-year this quarter, the strongest pace since 2011 outside of the COVID period.
"That changed this quarter, with consumers spending more and less focused on savings," says Westpac, linking the rotation to firmer sentiment.
Consumer spending was robust in the June quarter, but new business investment fell 0.4%qtr in the June quarter to be just 0.3% y/y higher in annual terms.
"The key uncertainty going forwards is whether the pick-up in consumption will continue and how long it will take for investment to turn around," says Westpac. "It is possible we could still get a shaky handover, which spills over into the labour market, but given today’s outcome this seems less likely".
Westpac also points to easing unit labour cost pressures ahead, with productivity improving and hours worked expected to soften, which would temper domestic inflation risks.
If consumption resilience endures while inflation pressures moderate, the growth mix could be more currency-friendly for the Australian dollar than earlier in the year.
As of Wednesday, AUD/USD traded around 0.65166 with a +0.04% daily change. GBP/AUD traded near 2.05114 with a −0.01% daily change.
At the same time, EUR/AUD was around 1.78465 with a −0.09% daily change.
Near-term upside in the Australian dollar would be reinforced if the consumption impulse persists and capex gradually responds to firmer demand, while setbacks could follow if one-off boosts fade faster than expected.
Markets now look to upcoming retail sales and the next RBA communications for confirmation that the GDP-led improvement in domestic momentum can translate into sustained AUD support.
"We continue to view AUD as undervalued, and our forecast revision reflects greater confidence that the currency will close the gap," says Deutsche Bank.