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Australia dollar caught by economic contraction, NZD resists

Published 07/12/2016, 01:39 pm
Updated 07/12/2016, 01:50 pm
© Reuters.  Australia dollar caught by economic contraction, NZD resists

© Reuters. Australia dollar caught by economic contraction, NZD resists

SYDNEY, Dec 7 (Reuters) - The Australian dollar slipped on Wednesday after data showed the economy shrank for the first time since 2011, raising the spectre of a possible recession following 25 years of growth.

The Australian dollar AUD=D4 fell to $0.7425, from $0.7460 early, pulling closer to a five-month trough of $0.7370 touched in November. Support was found around $0.7416.

It skidded around half a percent against its Kiwi cousin AUDNZD=R and the euro EURAUD= .

The weakness came after gross domestic product (GDP) fell 0.5 percent in the third quarter versus forecasts of a 0.3 percent gain. L4N1E20BW

Some economists think the setback is only temporary.

"I see this as a one-off because some of the factors which dragged down growth in the September quarter were reversed in the current quarter," said Shane Oliver, chief economist at AMP Capital.

Yet he still expects the Reserve Bank of Australia (RBA) to cut interest rates to a record low of 1.25 percent next year, partly because of stubbornly low inflation.

"In an ideal world, it would be the time for fiscal stimulus, but I think the government is too focused on reducing its budget deficit to maintain the triple A ratings, therefore all the pressure remains on the RBA," Oliver said.

Interbank futures 0#YIB: implied a probability of 24 percent for a cut by May, up from 14 percent on Tuesday.

A falling Aussie dollar against its Kiwi neighbour supported the New Zealand dollar NZD=D4 . It was steady at $0.7126, helped by another rise in dairy prices at a global auction overnight. was found at $0.7170, with support at Monday's low of $0.7070.

New Zealand government bonds 0#NZTSY= were a shade firmer, with yields down 1 basis point at the long end.

Australian government bond futures jumped on the soft GDP report, with the three-year bond contract YTTc1 up 5 ticks at 98.090. The 10-year contract YTCc1 rose 4 ticks to 97.2500, while the 20-year contract YXXc1 was steady near 96.5700.

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