Will soft GDP drag down the dollar?

A raft of data releases this week, including trade balance, retail sales and building approvals, should have little effect on the Australian dollar. But if GDP comes in weaker than forecast, expect its recent trading range to be tested.

It's a huge week ahead on the data front for the Australian economy. We have building approvals, GDP, retail sales and trade balance all out -- can any one of these sway the Aussie dollar one way or another?

GDP is obviously particularly critical as it's a key measure of economic growth. The market is expecting a pull-back from first quarter 1.1 per cent result to a second quarter reading of 0.4 per cent. This would bring the annualised rate down from 3.5 per cent to 3 per cent, but it is somewhat of a lagging indicator.

The beauty of this week’s releases is that we get a broad reading on the domestic economy, with data providing some insight across a number of fronts. Building approvals are important for construction activity and general confidence in the economy; so too are retail sales and the state of the consumer.

I can’t see any of these moving the Aussie out of this range unless we get a softer-than-expected GDP reading of say 0.2 per cent or less for the quarter -- in this scenario we could see a re-test of strong support between 92c and 92.50c.

Graph for Will soft GDP drag down the dollar?

RBA decision due

Will today’s Reserve Bank of Australia meeting have any impact on the currency this time? Well we know the RBA has been struggling to exert real influence over the Aussie, despite continued attempts to talk it down. It's not the only one concerned about the local unit's strength: BIS Shrapnel recently blamed the high dollar for sapping the strength of Australia's economic recovery.

It is likely the Reserve Bank will want to wait and see how the data pans out over the next month so I am not expecting any real change to the accompanying media statement. The bank has refrained from changing the tone of its comments towards the currency and I don’t expect any different.

We do however have RBA governor Glenn Stevens speaking on Wednesday about two hours after the release of the GDP numbers. It is much more likely he takes this as an opportunity to expand further on the bank's views.

All things said, I think the RBA still has more of a chance of exerting a greater influence on the Aussie dollar than any of the other domestic developments.

Big week for central bank meetings

The Bank of Japan, Bank of England and European Central Bank meet on Thursday, and it will be interesting to see if any policy changes are made.

There really are some stark contrasts between the central banks around the world. No change is expected from the Bank of Japan because even as they do nothing new they continue to expand their balance sheet.

The Bank of England still looks like it may be the first to increase rates, and although not likely this week the votes are likely to remain split as they were last time around (when two members voted for a rate rise).

The biggest anticipation this week centres on the ECB, especially since President Mario Draghi’s comments at Jackson Hole recently. Markets have been selling down the euro in anticipation of quantitative easing but I don’t think this will come this week.

We could see additional bank liquidity announced -- coupled with some strings attached and an expansion of rhetoric around what quantitative easing might look like. If the ECB was to go down that path then it's likely that over the course of the next year or two the euro will trade below 1.2 against the greenback -- not quite as bearish as Goldman's call for euro/US dollar parity in 2017 but bearish nevertheless. British pound/euro still looking strong and will be one of the main benefactors of continued Euro weakness as to will the Australian dollar/euro.

US employment report due

Four voting members of the Federal Reserve are due to speak on Friday before the US employment report, with Loretta Mester, Jerome Powell, Richard Fisher and Narayana Kocherlakota all speaking at separate events. It will be interesting to see if they move to set any sort of coordinated timeframe on expectations for interest rate tightening or have different views. If they differ and there is no clarity or consensus then we could see the greenback weaken.

The US employment report is expected to see 222,000 jobs added versus 209,000 in the last reading, with the unemployment rate down a touch to 6.1 per cent. However, given the most recent rhetoric it’s clear that these readings on their own will have less influence on the Fed's decisions.

Jim Vrondas is chief currency strategist, Asia-Pacific at OzForex, a global supplier of online international payment services and a key provider of Forex news.

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