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Australian Dollar Retreats After Economy Contracts, Ending Almost 30-Year Expansion

June 3, 2020 at 11:29 by Vladimir Vyun

A heap of AUD100 bill strapsThe Australian dollar was rising at the start of today’s trading session, reaching multi-month highs, but has retreated after the release of Australian gross domestic product for the first quarter of this year. The report revealed that the Australian economy contracted, ending its record almost 30-year period of growth.

The Australian dollar was able to weather many crises over the nearly three decades, managing to continue its expansion, but the COVID-19 pandemic and measures to contain it put an end to the prolonged period of growth. The Australian Bureau of Statistics reported that GDP contracted 0.3% in the March quarter of 2020. The decline was somewhat smaller than analysts’ expectations of a 0.4% drop.

As for other Australia’s economic reports released today, the Australian Industry Group/Housing Industry Association Australian Performance of Construction Index rose to 24.9 in May from 21.6 in April. The reading below 50.0 means that the industry continued to decline, though at a slower rate. Building permits fell 1.8% in April but the decline was nowhere near as big as a 10.8% slump predicted by experts.

The downside for the Australian currency was limited thanks to the good news from China, Australia’s biggest trading partner. The seasonally adjusted Caixin China Services PMI logged a sharp jump to 55.0 in May from 44.4 in April as the country was recovering from the pandemic. The reading above the neutral 50.0 level means that the industry returned to growth.

Yesterday, the Reserve Bank of Australia announced that it is keeping its main interest rate unchanged at 0.25%. RBA Governor Philip Lowe was cautiously optimistic in the accompanying statement, saying:

It is possible that the depth of the downturn will be less than earlier expected.

But he reminded about the high degree of uncertainty in any economic forecasts attempting to predict developments after the pandemic:

However, the outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy.

Lowe also said that the monetary policy will likely remain highly accommodative for a long time:

It is likely that this fiscal and monetary support will be required for some time.

AUD/USD was up from 0.6895 to 0.6983 intraday but has pulled back to about 0.6850 by 11:27 GMT today. EUR/AUD was down from 1.6192 to 1.6033 before rebounding to 1.6306. AUD/JPY declined from 74.92 to 74.53, retreating from the session high of 75.76.

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