• Look to our region’s data for Aussie strength.
• Economic data prompts speculation of impending CPR.
• Panda in the room during the title fight; US Vs Deflation.

 We’ve seen some strong gains in the local currency today off the back of better than expected data both here and in China. Economic data has taken on a new dimension recently with the interest rate differential between Australia and other developed economies now likely to remain wide and relatively stagnant for the next couple of months at least. Locally we had a better than expected annual GDP figure of 3.3% today, which continued a run of strong data including Retail Sales (0.7%), Construction Work Done (3.5%), Company Gross Operating Profits (18.9%) and Building Permits (2.3%). Our PMI figure (51.7) was down significantly however this was quickly offset by a sharply stronger PMI figure in China (also 51.7). Importantly, it was household spending that played a large role in the growth in GDP with spending at restaurants and cafes up 5.3%. Off the back of today’s data, the S&P ASX 200 closed up 2.08%.

If economic data is the wine of the foreign exchange market, then recent releases from the US resembles something closer to vinegar than it does a Grange. This week has seen another poor round of data emerging from the US and there is growing speculations that economic CPR will need to be performed by the US authorities to avoid a double-dip recession. Given the dismal data that has been released from that part of the world, there is concern that further stimulus packages will be required. Fed chairman Ben Bernanke did his bit on Friday to assure markets that he was prepared to implement the necessary strategy and despite the rather limp comment that the central bank would do “all that it can” to build on recent growth, is was capitalised on by the markets which gave risk-correlated assets a sizeable boost on Friday. There is concern however that growth in the US economy will be terminal by the time they implement the next stage of their strategy.

The current policy position of Ben Bernanke poses the question of just how the US authorities will stimulate the economy. He’s reluctant to implement greater quantitative easing given the combination that bond yields are low and that banks are proving stubbornly reluctant to lend. It’s not so much that Dr Bernanke wants no piece of the title fight it’s just that he doesn’t consider the payoff high enough to risk an ever-expanding Federal Reserve balance sheet. One option for the US is to engage in a trade war and move down the path of protectionist policies, the subsidising of particular industries while undermining the value of the USD. This is a strategy that China has used to great effect, of what is now a case of China’s panda in the room during the US title fight. This Friday’s unemployment data will be key in providing optimism in what is a country desperate for the green shoots of economic recovery to emerge.