Photographer: Brendon Thorne/Bloomberg

Australian Dollar's Resilience Places It Among the Biggest Gainers

  • GDP miss, faltering iron-ore rally still clouding outlook
  • Labor-capital divide holding, so is Aussie with RBA in neutral

The price of Australia’s key commodity -- iron ore -- started off the month by dropping more than 6 percent, and the pace of economic expansion held at about the weakest in eight years.

But that didn’t stop the Aussie dollar showing resilience that put it among the biggest gainers, benefiting from U.S. political paralysis and shrugging off concern from the Reserve Bank of Australia that the currency’s strength may weigh down inflation and growth. While Governor Philip Lowe emphasized a willingness to be very patient in holding interest rates at record lows, he also stuck to his assessment that stronger GDP gains are coming.

The following charts highlight key developments in Australia this week.

While iron-ore futures sagged as much as 6 percent this week, at about $78 a ton the raw material’s price when delivered to China is still well above recent lows and the Australian government’s budgeting assumptions. True, year-on-year growth in gross domestic product missed estimates, but it did at least hold at the same, revised pace as the first quarter.

One area that could encourage Lowe could be found in the details of the GDP release. He has been among those frustrated at a split in confidence levels between households and businesses, something that might be explained by record-low wage levels at a time of soaring corporate earnings. The GDP data showed that the labor share of income ticked up slightly from the first quarter’s record low at 46.2 percent of GDP, based on seasonally adjusted data. And businesses’ share declined for the first time in more than a year, snapping the steepest jump since the 1960s.

For now, the Aussie dollar is struggling to hold above 80 U.S. cents on a sustained basis. That’s likely to continue until the RBA gets enough positive data to turn the dial further toward a tightening bias. Swaps traders are still seeing just one rate increase at most in the coming year, and the local currency needs more than that to add much to an 11 percent climb this year that has made it the best performer among Asia-Pacific peers.

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