AUD/USD falls after Australian economic data hints at slower growth

• AUD/USD declines after the release of the Australian Current Account Balance uncovers a deficit in Q1. 
• The data indicates less profits from exports and lower economic growth, weighing on the Australian Dollar. 
• The US Dollar, meanwhile, bounces after Monday’s steep decline following lower-than-expected US manufacturing data. 

AUD/USD trades almost three-quarters of a percent lower in the 0.6640s on Tuesday, after the release of Australian Current Account Balance data for Q1 shows a 4.9 billion (AUD) deficit when a 5.9 billion surplus had been expected. The data suggests a trade balance that favors imports and weighs on the country’s economic growth prospects.  

The first-quarter deficit was caused by a fall in the trade surplus and rise in the net primary income deficit – or the net inflows from wages, foreign property and “entrepreneurial activities” abroad. The figures, released by the Australian Bureau of Statistics (ABS), also showed the previous quarter’s 11.6B surplus was substantially revised down to 2.6B.  

As an input into Gross Domestic Product (GDP) calculations the data has led many economists to lower their estimates of Q1 GDP growth which will be released on Wednesday. Consensus estimates are for GDP to have grown 0.2% quarter-over-quarter and 1.2% year-over year, however, Westpac, for example, has lowered its GDP forecast to 0.0% and 1.0% respectively. 

Other data for Australia showed a mixed picture for inflation, with the Melbourne Institute Monthly Inflation Gauge rising by 0.3% MoM in May, its highest since January, but cooling to 3.1% YoY, “its slowest reading since January 2022,” according to Jason Coombs, an Economist at Westpac, who says the data may provide a hint of what’s to come in official statistics. 

“The inflation measure has tracked above the official ABS monthly and quarterly inflation results since the middle of last year. Taken alone this could be a sign we may see some better inflation progress in May. However, it’s too early to draw too much from the move,” added Coombs. 

The US Dollar (USD) is bouncing back slightly on Tuesday as traders take profit and “back-and-fill” the steep slide from Monday. This came on the back of lower-than-expected ISM Manufacturing PMIs for the US. The decline in manufacturing was mainly put down to a steep drop in the “New Orders” subcomponent, raising fears about future growth. A fall in the “Prices Paid” subcomponent also lowered inflation-expectations, and increased bets the Federal Reserve (Fed) may finally get off first base and begin to cut interest rates. Current forecasts estimate a cut in September is now more likely than not (circa 67%), according to the CME FedWatch tool. 

In comparison the Reserve Bank of Australia (RBA) is not expected to cut interest rates until 2025, and is viewed as the last G10 central bank likely to begin cutting interest rates. This is due to the stubbornly high inflation being experienced in Australia. 

The outlook supports the AUD more than the USD providing a backwind for the pair. This is because it will likely close the rate differential between the two countries which currently supports the USD due to the higher interest rates in the US. Higher interest rates are generally positive for a currency as they increase foreign capital inflows but if the gap narrows AUD could rise from the narrowing differential.