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AUD/USD: Trading the Australian 2Q GDP Report

AUD/USD: Trading the Australian 2Q GDP Report

2011-09-05 20:00:00
David Song, Currency Strategist
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Trading the News: Australia 2Q GDP

What’s Expected:

Time of release: 09/06/2011 1:30 GMT, 21:30 EST

Primary Pair Impact: AUDUSD

Expected: 1.0%

Previous: -1.2%

DailyFX Forecast: 0.5% to 1.0%

Why Is This Event Important:

Australia is expected to expand 1.0% in the second quarter after contracting 1.2% during the first three-months of the year, and the rebound in GDP could spark a bullish reaction in the exchange rate as it raises the prospects for a sustainable recovery. As the economy regains its footing, the Reserve Bank of Australia may highlight an improved outlook for future growth, and the central bank may preserve its wait-and-see approach throughout the remainder of the year in an effort to balance the risks for the region. However, as the region copes with an uneven recovery, the slowdown in global trade is likely to become a growing concern for the RBA, and Governor Glenn Stevens may show an increased willingness to abandon the ‘mildly restrictive’ policy as growth and inflation falter.

Recent Economic Developments

The Upside

Release

Expected

Actual

Inventories (2Q)

0.3%

2.5%

Company Operating Profits (QoQ) (2Q)

2.9%

6.7%

Private Capital Expenditure (2Q)

4.0%

4.9%

The Downside

Release

Expected

Actual

Building Approvals (MoM) (JUL)

2.0%

1.0%

Construction Work Done (2Q)

1.0%

0.7%

Retail Sales ex Inflation (2Q)

0.4%

0.3%

The jump in business investments paired with the rise in inventories should help to spur a rebound in GDP, and a positive reading could lead the AUD/USD to recoup the losses from earlier this month as the data highlights an enhanced outlook for the region. However, the ongoing weakness within the private sector paired with the tepid pace of reconstruction could bear down on economic activity, and a dismal growth report is likely to fuel the near-term correction in the AUD/USD as interest rate expectations falter. According to Credit Suisse overnight index swaps, market participants see the RBA cutting the benchmark interest rate by more than 125bp over the next 12-months, and speculation for lower borrowing costs may gather pace as the central bank softens its outlook for the region.

Potential Price Targets For The Release

AUDUSD_Trading_the_Australian_2Q_GDP_Report_body_ScreenShot034.png, AUD/USD: Trading the Australian 2Q GDP Report

How To Trade This Event Risk

A rebound in GDP reinforces a bullish outlook for the aussie, and the market reaction could pave the way for a long Australian dollar trade as growth prospects improve. Therefore, if the growth rate expands 1.0% or greater in the second-quarter, 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 an effort to preserve our profits.

In contrast, the slowdown in global trade paired with the uneven recovery could lead to a dismal GDP report, and the RBA may show an increased willingness to bring down the cash rate from 4.75% in an effort to balance the risks for the region. As a result, if the growth rate expands less than 0.5% or unexpectedly contracts from the first quarter, we will implement the same strategy 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

06/01/2011 1:30 GMT

-1.1%

-1.2%

+51

-65

1Q 2011 Australia Gross Domestic Product

Economic activity contracted 1.2% in the first-quarter after expanding a revised 0.8% during the last three-months of 2010, and the Reserve Bank of Australia may endorse a wait-and-see approach throughout the remainder of the year as the region faces a slowing recovery. The breakdown of the report showed a 0.6% rise in consumption paired with a 0.7% rise in business investments, while exports slumped 2.1% after increasing 0.6% in the fourth-quarter. As the natural disasters from earlier this year disrupts the recovery, the RBA may soften its hawkish outlook for inflation, and the central bank may talk down speculation for higher interest rates as the marked appreciation in the exchange rate dampens the prospects for an export-led recovery. Despite the dismal GDP report, the AUD/USD quickly turned around, with the exchange rate rallying above 1.0700, but the advance was short-lived as the aussie-dollar ended the day at 1.0613.

AUDUSD_Trading_the_Australian_2Q_GDP_Report_body_ScreenShot033.png, AUD/USD: Trading the Australian 2Q GDP Report

Questions? Comments? Join us in the DailyFX Forum

Join DailyFX 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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