Australian Dollar Falters in Spite of Higher Second Quarter Growth

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  • Solid Second Quarter Growth Unable to Boost Australian Dollar – Narrowed trade surplus to put further pressure on AUD
  • Reports of Brexit Breakthrough Shore up Pound Sterling – Underwhelming UK PMIs highlight worries over domestic outlook
  • Cautious Bank of Canada Message Leaves CAD Exchange Rates Weaker – Investors still expect October interest rate hike
  • Dovish Fed Comments Take Edge off Bullish US Dollar – Forecasts point towards robust service sector growth

Second Quarter Growth Acceleration Fails to Buoy Australian Dollar

While the second quarter Australian gross domestic product bettered forecasts, accelerating to 3.4% on the year, the mood towards the Australian Dollar still soured yesterday. Even as the domestic economy showed greater signs of growth AUD exchange rates were dragged down by the disappointing nature of the latest Chinese services PMI. With a strong US Dollar and fragile emerging market economies weighing on market sentiment the ‘Aussie’ returned to a downtrend.

As July’s trade balance is expected to show a narrowing of the surplus on the month this may keep AUD exchange rates under pressure today.

Brexit Breakthrough Rumours Prompt Pound Surge

Reaction to the better-than-expected UK services PMI proved muted, leaving the Pound on a weaker footing thanks to lingering concerns over the domestic outlook. Although the UK economy remains on track for another quarter of 0.4% growth easing business confidence suggests that this momentum could soon diminish. However, GBP exchange rates surged higher overnight on rumours of a Brexit breakthrough as reports suggested that German may accept a less-detailed agreement on future relations.

Hopes of further progress towards a finalised Brexit deal could buoy the Pound today, even in the absence of domestic data.

Weaker Eurozone Services PMIs Fail to Drag on Euro Rates

Investors were caught off guard as August’s raft of Eurozone services PMIs saw a downward revision, indicating that sector growth is weaker than previously thought. This did little to improve the appeal of the single currency, particularly as July’s Eurozone retail sales showed a contraction on the month. However, the Euro was able to benefit from the weakness of its commodity-correlated rivals on Wednesday as market risk appetite diminished.

With a rebound forecast for July’s German factory orders figures EUR exchange rates could find additional support this afternoon.

US Dollar Upside Limited by Dovish Fed Comments

Dovish commentary from St Louis Fed President James Bullard did not encourage any particular confidence for USD exchange rates. While Bullard warned that the Federal Reserve should not continue to raise interest rates this was not seen to significant alter the odds of further monetary tightening. A sharp widening of the US trade deficit also weakened the appeal of the US Dollar, raising the risk of the Trump administration continuing its retreat into protectionism.

A fresh acceleration in the ISM non-manufacturing composite index is likely to shore up USD exchange rates overnight, however.

CAD Weakens as BOC Issues Warning on Trade Tensions

Although it came as no surprise that the Bank of Canada (BOC) left interest rates on hold at its September meeting demand for the Canadian Dollar still declined. Policymakers expressed caution over elevated trade tensions, with the US and Canada still yet to resolve trade discussions. While markets expect the BOC to deliver a rate hike at its October policy meeting this was not enough to prevent CAD losses. As oil prices also fell into decline this left CAD exchange rates lacking in support last night.

Signs of a rebound in the Canadian housing sector may help to give the Canadian Dollar a leg up today.

New Zealand Dollar Shrugs Offs Continued Commodity Price Contraction

A slightly more modest contraction in the ANZ commodity price index limited the bearishness of NZD exchange rates on Wednesday. Even though confidence in the outlook of the New Zealand economy looks limited the appeal of the New Zealand Dollar still picked up yesterday. With other risk-sensitive assets falling out of favour the ‘Kiwi’ was able to capitalise on the weakness of certain rivals, in spite of the weaker underlying support for NZD exchange rates.

Even so, the New Zealand Dollar remains vulnerable to the strengthening US Dollar in the near term.

Data Released

September 6th 11:30 AUD Trade Balance (JUL) 1.4 billion
September 6th 16:00 EUR German Factory Orders (YoY) (JUL) 1.9%
September 6th 22:30 CAD Building Permits (MoM) (JUL) 0.8%
September 7th 00:00 USD ISM Non-Manufacturing Composite Index (AUG) 56.6

Post by TorFX

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