US GDP disappoints

After the Bank of Japan surprised markets with no further stimulus, the yen had a 3% rally and its strongest one-day performance since China devalued the yuan in August last year.

Source: Bloomberg

The US dollar initially shrugged off these developments, but the release of weaker than expected 1Q GDP saw the Dollar index lose over 1% as hopes for a June rate hike were definitively dashed. Business investment, net exports and inventories all dragged on GDP, while consumption growth was weaker than many had hoped.

The current set up for the Asian session is looking quite negative. Carl Icahn sold his US$4 billion stake in Apple, which sent the stock down 2.9% and impacted US markets due to its large market capitalisation weighting. The ASX is set to open 0.1% lower as equity markets continue to react poorly to weak US growth and lack of further stimulus from the Bank of Japan. Although the materials and energy space is set to see a strong day. The commodities space was a clear winner from the decline in the US dollar as most major contracts are priced in USD and saw their value comparatively increase. WTI oil gained 1.2% overnight as it continued in its incredibly robust uptrend.

After prices were impacted by China trying to rein in some of the rampant speculation in its commodity futures markets, Dalian iron futures bounced back yesterday and gained 6%. The Qingdao iron ore price similarly gained 3%. The Chinese stimulus that spurred the gains in the commodities space is not over yet so it is unlikely that in the short term we will see the iron ore price crash back down into the US$40 handle. Although a rally in the USD and slowing Chinese credit growth is likely to change such a situation over the coming months.

It is also quite a big day for data releases. Australian 1Q PPI and private sector credit numbers will be released. After the major CPI miss, analysts will be carefully looking at the PPI numbers to see similar weakness and how that may play into RBA’s interest rate decisions.

While US GDP growth was weak in 1Q, this is historically quite common in the US and growth often rebounds in 2Q. And since then we have seen significant weakness in the USD and there is a good chance we start to see the data pick up from here.

The US dollar also looks unlikely to break significantly lower. The DXY dollar index is currently resting on a very consistent resistance level around 93.8 and it has already bounced off this level three times in April and May. Indicating that it would not take all that much good economic news out of the US to start seeing the US dollar start gaining strongly.

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