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GDP surprise sends Aussie back to US73¢

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The Australian dollar hit new highs for the year on Thursday, propelled by Wednesday's surprisingly robust national accounts and a series of external drivers.

The surge, to a new year-to-date peak of US73.22¢, could put renewed pressure on the Reserve Bank of Australia to consider a cut to the cash rate from 2 per cent, although it remains reluctant to do so.

Australia's reference rates are among the highest in the developed world, making assets such as government bonds attractive to foreign investors.

Investor inflows are among the supports for the currency, which the RBA hopes to keep below US75¢ to help sustain the economy's transition away from resource-related investment.

Board member John Edwards said recently he would like to see the Aussie around US65¢, but the RBA long ago stopped trying to talk the currency down in its monthly policy meeting statements, referring only to its "adjustment" in line with lower commodity prices.

However, commodity prices have recently rebounded, prompting a growing number of economists to suggest the domestic currency is now close to fair value.


"The Aussie is up from its lows in mid-January, but commodity prices are also up from their lows," St George senior economist Janu Chan said in recent Fairfax survey.

In late local trade on Thursday, the Aussie was buying US73¢, after having peaked during the day at US73.22¢, a high point for the year, on data showing that the trade deficit narrowed in January.

Thursday afternoon's level was about US1¢ higher than at the same time on Wednesday.

However, some economists argue that eventual interest rate increases by the US Federal Reserve and the slowdown in China will contain the Aussie's rise.

"So far this year the Aussie has fallen from US73¢ to near US68¢ and now back to US73¢, with the Aussie GDP stunner driving the final leg of the round trip," Westpac economists wrote on Thursday.

"The more upbeat global mood should help it near term, but investor caution over China might cap it around US74¢.

GDP top end of forecasts

 The main trigger for the local unit's latest rally was the release of Australia's national accounts, which showed a surprising 0.6 per cent expansion in gross domestic product in the fourth quarter of 2015, at the top end of economists' forecasts. 

This put year-on-year growth at 3 per cent, after an upward revision in the third quarter, from 0.9 per cent to 1.1 per cent. 

Economists seized on the data to support the Reserve Bank of Australia's recently relaxed view on Australia's exports- and services-led economic readjustment after the mining infrastructure boom began to wind down in 2012.

Most expect the RBA to hold the cash rate at 2 per cent for the rest of this year, although interest rate swaps market pricing on Thursday still had the chance of a 25 basis point cut at the September board meeting at 96 per per cent.

This compares with an 88 per cent chance of one at the July meeting before Wednesday's GDP release.

The relatively high yield offered by government bonds – at a time of low and even negative fixed-income returns across the world – is also supporting the currency.

This could be driving a resurgence in so-called carry trade, when investors borrow in one currency at low rates and buy bonds in another with higher rates, says BK Asset Management's managing director of foreign exchange Boris Schlossberg.

Another pick-up in the price of oil, and key commodities such as copper and iron ore, which was priced at a four-month high, also helped buoy the Aussie.