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AUD/USD: Trading Australia’s 1Q GDP Report

AUD/USD: Trading Australia’s 1Q GDP Report

2011-05-31 19:52:00
David Song, Currency Strategist
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Trading the News: Australia 1Q GDP

What’s Expected:

Time of release: 06/01/2011 1:30 GMT, 21:30 EST

Primary Pair Impact: AUDUSD

Expected: -1.1%

Previous: 0.7%

DailyFX Forecast: -1.5% to -1.0%

Why Is This Event Important:

Economic activity in Australia is expected to contract 1.1% in the first-quarter following the slew of natural disasters from earlier this year, and a dismal GDP report is likely to weigh on the exchange rate as the central bank maintains a cautious outlook for the region. As the Reserve Bank of Australia anticipates the marked appreciation in the local currency to bear down on inflation, a larger-than-expected drop in growth may lead the central bank to carry its wait-and-see approach into the second half of the year, and the AUD/USD may face additional selling pressures over the near-term as interest rate expectations falter. In turn, the reversal from the record-high (1.1011) may gather pace going forward, and the exchange rate may work its way back towards 1.4000 this week to test for psychological support.

Recent Economic Developments

The Upside

Release

Expected

Actual

Private Capital Expenditure (1Q)

2.7%

3.4%

Inventories (1Q)

0.1%

0.4%

NAB Business Confidence (1Q)

--

11

The Downside

Release

Expected

Actual

Net Exports of GDP (1Q)

-1.1%

-2.4%

Company Operating Profits (1Q)

2.0%

-2.0%

Retail Sales ex Inflation (1Q)

0.6%

0.0%

The rebound in business confidence paired with the expansion in private sector investments should help to boost economic activity in the region, and a better-than-expected GDP report should help to prop up the Australian dollar as the central bank expect the recovery to gather pace later this year. However, as households and business cope with the aftermath of the natural disasters that tore through Queensland, the drop in private sector consumption paired with the slowdown in global trade certainly raises the risk of seeing a large contraction in the growth rate. In turn, a disappointing 1Q GDP report is likely to drag on the exchange rate, and the RBA may look to support the real economy for most of 2011 in order to stimulate growth.

Potential Price Targets For The Release

AUDUSD_Trading_Australias_1Q_GDP_Report_body_ScreenShot057.png, AUD/USD: Trading Australia’s 1Q GDP Report

How To Trade This Event Risk

Forecasts for a contraction in 1Q GDP certainly reinforces a bearish outlook for the high-yielding currency, but an enhanced growth report could set the stage for a long Australian dollar trade as market participants expect to see higher borrowing costs in the isle-nation. As a result, if the growth rate contracts less than 1.0%, we will need to see a green, five-minute candle following the release to generate a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

On the other hand, the ongoing slack within the domestic economy paired with the aftermath of the natural disasters could produce a larger-than-expected drop in economic activity, and we may see a sharp selloff in the exchange rate as market participants scale back speculation for higher borrowing costs in Australia. Therefore, if the growth rate contracts 1.1% or greater in the first-quarter, we will carry out the same setup for a short aussie-dollar trade as the long position mentioned above, just in reverse.

Impact that Australia GDP has had on AUD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

4Q 2010

03/02/2011 0:30 GMT

0.7%

0.7%

-18

+18

4Q 2010 Australia Gross Domestic Product

Economic activity in Australia expanded 0.7% during the last three-months of 2010 after rising a revised 0.1% in the previous quarter, which was largely driven by a rise in government spending paired with a record pace of business investments. As the isle-nation benefits from global trade, the recovery should gather pace going forward, but the slew of natural disasters that hit Queensland will certainly dampen growth in the first three-months of 2011 as private sector activity falters. However, as the Reserve Bank of Australia sees the rebuilding efforts boosting economic activity later this year, the central bank may look to toughen its stance against inflation, and Governor Glenn Stevens may see scope to tighten monetary policy further in the second-half of 2011 as the economy is expected to increase an annualized 4.25%. The initial reaction to the in-line print was certainly short-lived as the AUD/USD slipped to a low of 1.0084 during the overnight trade, but the Australian dollar retrace the decline as the exchange rate settled at 1.0163 at the end of the day.

AUDUSD_Trading_Australias_1Q_GDP_Report_body_ScreenShot056.png, AUD/USD: Trading Australia’s 1Q GDP Report

Questions? Comments? Join us in the DailyFX Forum

Join Currency Strategist Ilya Spivak in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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