Research Team at Westpac, suggests that markets were braced for another lukewarm Australian GDP reading in Q4, with consensus 2.5% y/y. but instead AUD/USD jumped from below 0.72 as the ABS reported 0.6% growth q/q and upward revisions to produce an eye-catching 3.0% annual growth pace. Key Quotes “This matched the isolated reading in Q1 2014, with the previous 3% handle way back in Q3 2012. Encouragingly, the main source of surprise was household spending. We had been concerned about consumption, given slowing wages growth and post-GFC consumer caution. So the 0.8% q/q gain, following 0.9% in Q3 effectively off set the inevitable detraction from the ongoing fall in mining investment. The strong end to 2015 helps explain the strength of job creation in the monthly labour force series, though it still seems likely that jobs growth in coming months will be a lot slower than the Q4 surge. As always, there are some reasons to be wary about such a big surprise. As David notes on p5, the acceleration in consumer spending was largely driven by Australians saving less, which is not a durable source of demand. Indeed RBA governor Stevens continued to sound wary in the statement this week, repeating the Feb line that there are “reasonable prospects for continued growth in the economy”, with low inflation providing “scope for easier policy” if needed to support demand. Westpac still sees no change in the cash rate this year but market pricing continues to lean towards another cut: 40% chance by May, rising to 100% by Oct. Despite positives such as calmer Chinese markets, Wall Street recovery and Australian GDP, the weight of money is still placed for further bad news ahead. This should be enough to cap the AUD/USD rally around 0.7400.” For more information, read our latest forex news.