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Australian dollar gains on GDP data

Australian dollar gains on GDP data

The Australian dollar jumped after data showed the fastest annual economic growth in Australia in three-and-a-half years.

The Australian dollar (AUD) jumped to test resistance at US73 cents after data showed the fastest annual economic growth in Australia in three-and-a-half years.

Immediately after the Australian Bureau of Statistics (ABS) released the gross domestic product (GDP) data, the AUD rose to US72.99 cents, up from US72.33 cents earlier in the morning.

The Australian economy grew by 1.1% in the March quarter after an upwardly revised 0.7% increase in the September quarter (previously up 0.6%).

Forecasts had centred on 0.8% growth in the economy in the quarter.

Opportunity for cash rate cuts

"The economy still hasn’t experienced a recession for almost 25 years," said CommSec chief economist Craig James in a note, with growth at 3.1% over the past year.

Arguably with inflation low and likely to remain low, the Reserve Bank of Australia (RBA) could cut rates, run the economy at a faster rate, and generate more jobs, James said.

The RBA cut the official cash rate (OCR) by 25 basis points to a record low 1.75% at its May board meeting.

Risk of lower rates

The next board meeting is on 7 June. The Australian Securities Exchange Rate Indicator is currently forecasting a 90% chance of no change and a 10% chance of a cut to 1.5%.

"But the risk is that lower rates will just add more fuel to the super-strong housing market," said James.

"The last thing the Reserve Bank wants is to create an unsustainable boom in housing that could lead to a housing bust and broader economic downturn."

There's been house price growth in every capital city in 2016 so far except Perth (down 2.8%), with Sydney (up 8.3%), Hobart (up 6.5%) and Canberra (up 6.2%) the strongest performers.

Commonwealth Bank economists have pencilled in two further rate cuts in 2016, in August and November, dates which follow inflation updates.

"Today’s figures confirm that the Australian economy finds itself with a unique set of circumstances that will continue to perplex policymakers and complicate the interest rate outlook," said Commonwealth Bank chief economist Michael Blythe in a note.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.