AUD Rallies Despite GDP Drop, PMIs Upcoming

The Australian dollar surged higher despite a lower-than-expected report on Q1 GDP. The New Zealand dollar is lagging after Q1 terms of trade rose just 0.9% compared to the +2.2% consensus. The focus now shifts to manufacturing PMIs for Europe, the UK and US.

Australias economy contracted 1.2% q/q compared to the -0.3% expected. We warned that the market was pricing in a weaker-than-consensus reading and some late forecasts were as low as -1.7%. Still, it appears as though traders were waiting to get past the report before buying on the belief that growth will rapidly accelerate in the months ahead. Temporary factors due to flooding and the Japanese disaster were negative factors with 6.1% fall in mining output, and 8.9% slump in agriculture, forestry & fishing.

Before and after the GDP report, Ashraf continued to recommend long positions in AUD/JPY. For more see Tuesdays Premium Piece and get access to Ashrafs premium twitter account: http://ashraflaidi.com/products/sub01/access/?a=434 for the latest positions in US Crude, Silver & EURJPY.

Another example of where the economist consensus might not reflect market pricing is the ISM manufacturing report coming up in US trading. Soft regional readings including yesterdays Chicago PMI mean the market is priced 2-3 points below the 57.5 consensus.

In Japan, the yen got a modest lift after BOJ Gov Shirakawa maintained the recent policy stance as he said predicted a moderate recovery path in fiscal H2 on inventory rebuilding and a rebound in exports.

The official Chinese PMI for May beat the 51.6 expectation to come at 52.0 though the index fell from 52.9 in April. Similarly, HSBCs Chinese PMI was revised to 51.6 in the final reading versus the earlier 51.1 estimate and April reading of 51.8. The upshots to manufacturing have helped to underscore AUD gains and have helped build on positive risk sentiment.

One report that threatens to dampen sentiment came from the China Securities Journal, which is reporting that May inflation could rise to 5.4% or 5.5% from the 5.3% level in April. This means more tightening from China, which should dampen global growth.

The focus in the upcoming session will remain on manufacturing as Europe and the UK are set to release manufacturing PMIs for May. Europe is expected to remain steady at 54.8 while the UK is forecast to slow to 54.2 from 54.6. Look for these reports along with the US ISM to set the tone for trading for the rest of the week.