- AUD lower following worse-than-expected GDP data.

- Coronavirus prompts first recession since early 1990's.

- Widespread USD rebound aids AUD underperformance.

Image © Desiree Caplas. © Taras Vyshnya, Adobe Stock

GBP/AUD spot rate at time of writing: 1.8167Bank transfer rate (indicative guide): 1.7487-1.7614FX specialist providers (indicative guide): 1.7849-1.7958More information on FX specialist rates hereThe Australian Dollar was wobbled on Wednesday after the full cost of the coronavirus containment effort pushed Australia into its first recession for decades and as the U.S. Dollar rebounded following a hat-trick of losses.

Australia's economy shrank -7% in the second quarter, the Australian Bureau of Statistics said, building on a -0.3% decline from the opening months of the year and when consensus was looking for only a -6% fall.

The economic contraction pushed Australia into its first recession since the early 1990's following that followed government mandated closure of the economy that was intended to slow the spread of coronavirus.

"Nominal GDP growth, as measured by incomes fell 7.5%, the largest decline on record. The annual rate fell from 3.1% in the March quarter to -5.8% in the June quarter, also the weakest on record, and the first annual decline in nominal incomes since 1991," says Besa Duda, chief economist at St George Bank. "Given the lift in COVID-19 cases in NSW and Victoria over the September quarter, and the restrictions imposed in Victoria, economic growth may not return until the December quarter of the year."

Above: Australian quarterly and annualised GDP falls. Source: Australian Bureau of Statistics.

Household consumption fell sharply and given that it normally accounts for around 55% of GDP, was the main driver of the decline, although falls in business investment and construction also played a role.

"The focus is now on Q3 GDP – how much the second wave and associated shutdown in Victoria has weighed on growth – and Q4 – how the economy will manage with sharply lower fiscal stimulus," says Felicity Emmett, an economist at ANZ. "The unemployment rate is currently 7.5%, with the Government acknowledging that the effective rate is 9.9%. Significant further stimulus over the next few years is likely be required to generate growth and jobs and drive the unemployment rate down."

Meanwhile, and on a brighter note, public sector spending rose strongly to A$52bn during the period, which is equal to more than 10% of GDP, as welfare payments surged. The Australian government's Jobkeeper programme that subsidises employee wages cost A$31bn last quarter.

"The governments’ support packages have played a key role in containing the impact on household incomes from the containment policies. The December quarter will – on current policy settings – see a considerable scale back in that support affecting both households and business. However, as demonstrated by the spike in the savings rate, the household balance sheet is in much better shape to cope with the partial withdrawal of the government payments," says Bill Evans, chief economist at Westpac.

Above: Australian Dollar performance against major rivals on Wednesday. Source: Pound Sterling Live.

Australia's Dollar was trading at the bottom of the major currency league table during the European morning Wednesday, with its largest loss coming against a U.S. Dollar that was enjoying a widespread rebound following days of declines.

The Pound-to-Australian Dollar rate was a fraction higher but below 1.82 after August's range-bound trading gave way to fresh declines for Sterling earlier this week while AUD/USD eased back from two-year highs above 0.74.

"We flagged yesterday AUD/USD would consolidate following the temporary boost from end of month hedging and settlement for the Australian government’s massive bond. CBA was a lead on the deal. AUD has further downside in the near term, but the fundamentals still support further gains in AUD over the medium term. The major road‑block to gains in AUD before year end is the US presidential election in just over two months," says Joseph Capurso, a strategist at Commonwealth Bank of Australia.

Above: AUD/USD shown at daily intervals alongside Dollar Index (black line, left axis).

The Australian Dollar had been one of the better performers into month-end having benefited from continued gains in stock markets and an unravelling of the U.S. Dollar, not to mention strong overseas demand for comparatively high yield bonds issued by the Australian government.

Westpac, CBA and other local lenders look for AUD/USD to rise further toward 0.75 and to sustain such levels into year-end, while the Pound-to-Australian Dollar rate is expected to edge lower, although there are multiple risks to that outlook including a wildcard November U.S. presidential election.

"The Reserve Bank of Australia’s (RBA's) decision to expand the Term Funding Facility at its September meeting may have been its only policy adjustment, but it was a lack of action or rhetoric on AUD which made the bigger difference. By simply acknowledging that the AUD had strengthened in a way which reflected dollar weakness, the central bank appears willing to rule out pass through effects for now, while implicitly acknowledging that there is a valuation case for the AUD to continue to strengthen," says Geoff Yu, a strategist at BNY Mellon.

Above: Pound-to-Australian Dollar rate shown at daily intervals.