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GDP, Central Bank Statement to Fuel Aussie Gains

This week we saw that second-quarter GDP expanded at a rate higher than market estimates, with growth of 2.6% measured annually. The improved number helps to reinforce the RBA's position, suggests sector declines have had a limited impact and makes it less likely we will see another cut in interest rates before the end of the year.

Typically, the Australian dollar trades in ways that are highly sensitive to broader risk sentiment present in the market. Investors looking to take a position in the currency will have to consider negative external factors, such as shaky demand for raw materials in China, or the possibility of stimulus tapering in the U.S.

But with the domestic economy showing sustainable growth, and the global recovery progressing favorably in both the U.S. and the eurozone, the Australian dollar offers an excellent risk-to-reward framework given its cheaper valuations and improving fundamental backdrop.

In the near term, the currency remains vulnerable to increased volatility after this week's critical Non Farm Payrolls release in the U.S. and Australia's general elections next Saturday. These trends will likely carry over into the aftermath of the Federal Reserve bond "tapering" decision and the next round of debt discussions in the U.S. Congress.

But the overall impact from these external effects will be short-lived, and the Australian dollar is starting to look like an excellent value from a longer term perspective.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is based in China, and has lectured at several universities there on international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.
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