RBA Sits Tight, Q1 GDP Up Next

The Reserve Bank of Australia met earlier today and as widely expected kept the official rate steady at 4.5%. The tone of the statement was fairly neutral, as one might expect after 6 rates hikes since last October and increased uncertainty about the economic outlook of Europe and China.

Australia reports Q1 GDP figures first thing in the Australian morning on Wednesday. The consensus expects a 0.6% quarter-over-quarter expansion; slower than the 0.9% pace seen in Q4 09, but near last year's average quarterly pace (0.67%).

Inventory rebuilding is likely to have contributed more to growth than in Q4 09. Foreign demand also looks promising as Australia reported a somewhat smaller trade deficit in Q1 10 than in Q4 09. Despite relatively healthy job creation, it has not spilled over to help consumption very much. Over the quarter, retail sales rose 0.5%. In Q4 09 retail sales rose 1%.

The Australian dollar is not being driven by its high interest rates, The steep 13.5% loss recorded from April 30 through May 25 seems largely a function of the unwinding of risk trades, like long AUD short JPY.

Within our constructive view of the dollar bloc in general, given that the Australian interest rate cycle is mature, we have suggested that the Canadian dollar, which hiked rates today for the first time, may out-perform. Some observers emphasize the pullback in China's PMI today (though another PMI was firmer), but we think the China story is still a net positive for Australia.

After falling to $0.8282 earlier today that Aussie bounced to $0.8437 in the North American morning, as the equity market recovered, illustrating the "real" driver of the Australian dollar. Intra-day technical readings are over-extended. Support is now seen near $0.8350.