Fade AUD strength as GDP data soft beyond the headlines
Our economists note that, at face value, Australia’s Q1 GDP report appears robust with growth of 0.9%, above market expectations for 0.7%. The underlying details, however, were soft. The entire expansion of the economy can be explained by net exports, inventories and the statistical discrepancy, with domestic demand growth flat over the quarter due to a 3.2% q/q decline in business investment. The data supports the RBA’s view that further rate cuts are possible if data disappoints. The RBA is also likely to cut if the AUD remains too strong. As such, we expect the AUD’s bullish reaction to the release to be temporary and remains short AUDNZD.
Look for Draghi to reassure EUR bears once again
The EUR’s rally on Tuesday could be partly attributed to the eurozone May CPI surprised on the upside, boosting eurozone yields as the data and leading to questions on the longevity of the ECB’s QE program. However, with the ECB committed to returning CPI and inflation expectations back towards 2.0%, we expect President Draghi to once again use his post ECB press conference Wednesday as an opportunity to push back against the idea that purchases could be curtailed. Updated staff projections will also be released, and, while inflation expectations will likely be revised up slightly, we would emphasize that the staff’s estimates will assume continuation of the purchase program. We remain broadly bearish on the EUR and would favour fading this latest rebound in EUR crosses.