Economic activity in Australia is expected to improve throughout the second-half of the year as economists forecast the growth rate to expand 0.2% in the second quarter, and a rise in the GDP is likely to push the AUD/USD higher over the near-term as investors anticipate the central bank to tighten policy over the next 12 months.
[B][U]Trading the News: Australian Gross Domestic Product[/U][/B]
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[B][U]What’s Expected[/U][/B]
Time of release: [B]09/01/2009 01:30 GMT, 21:30 EST[/B]
Primary Pair Impact[B] : AUDUSD[/B]
Expected: 0.2%
Previous: 0.4%
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[B][U]Impact the Australian GDP had on AUDUSD over the last 2 quarters[/U][/B]
[U]1Q 2009 [/U][U]Australia[/U][U]n Gross Domestic Product[/U]
Economic activity in Australia expanded 0.4% in the first quarter amid expectations for a 0.2% contraction, and the data encourages an improved outlook for the $1T economy as the government takes unprecedented steps to stem the downside risks for growth and inflation. The Reserve Bank of Australia cut borrowing costs by 25bp to a 49-year low of 3.00% in April while Prime Minister Kevin Rudd pledged A$ 12B in government hand outs to shore up the ailing economy, and the expansion in monetary and fiscal policy should help to steer the nation out of the recession as economic activity in China, Australia’s biggest trading partner, improves. However, as the central bank head Glenn Stevens holds a dovish outlook for inflation and stands ready to take further steps to stimulate the economy, the Australian dollar may continue to weaken against its currency counterparts as the interest rate outlook falters.
[U]4Q 2008 Australian Gross Domestic Product[/U]
The GDP reading showed economic activity unexpectedly fell 0.5% in the second quarter to mark the first contraction in eight years, and conditions are likely to get worse as trade conditions falter. As a result, the Reserve Bank of Australia lowered the benchmark interest rate to a 45-year low of 3.25% during the previous month in an effort to stem the downside risks for growth and inflation, and the central bank may take further steps to stimulate the ailing economy as growth prospects deteriorate. Credit Suisse overnight index swaps show a 72% chance for a 50bp rate cut next month as the central bank maintains a dovish outlook for inflation, and the downturn in the interest rate outlook may continue to drag on the exchange rate as investors anticipate the RBA to ease policy further in the months ahead.
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What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:[/U][/B]
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on AUDUSD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on AUDUSD ahead of the data release.
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How To Trade This Event Risk[/B]
Economic activity in Australia is expected to improve throughout the second-half of the year as economists forecast the growth rate to expand 0.2% in the second quarter, and a rise in the GDP is likely to push the AUD/USD higher over the near-term as investors anticipate the central bank to tighten policy over the next 12 months. A report by the Bureau of Statistics showed retail spending increased 2.0% during the three-months through June, while employment unexpectedly increased in July, and the rebound in business confidence encourages an enhanced outlook for future growth as the government takes unprecedented steps to soften the landing of the $1T economy. However, company operating profits tumbled 7.8% in the second quarter to mark the biggest decline since 2003, while inventories plunged 3.4% during the same period, which is the largest drop since recordkeeping began in 1985, and firms may continue to lower their rate of production going into the following as trade conditions deteriorate. The current account deficit widened to A$13.3 from the first quarter following a 19% drop in exports, while the RBA’s gauge for commodity prices weakened for the fifth consecutive month in August, and fears of a slower recovery may lead the government to ease policy future over the coming months in an effort to stem the downside risks for growth and inflation. TheReserve Bank of Australia held the benchmark interest rate at the 49-year low of 3.00% for the fifth consecutive month in September, and is likely to maintain a neutral policy stance over the coming months as the central bank states “the present accommodative setting of monetary policy remains appropriate for the time being.” Moreover, the central went onto say that the risks for inflation to hold below the 2-3 percent target ‘looks low,’ and held an improved economic outlook as policy makers anticipate growth prospects ‘to firm going into 2010.’ At the same time, RBA Governor Glenn Stevens expects ‘financial constraints’ to hamper business spending over the near-term and projects price pressures ‘to moderate’ in the coming months on the back of lower commodity prices, and the caution tone held by the central bank head suggests borrowing costs will stay low going into the following year in an effort to foster a sustainable recovery. Credit Suisse overnight index swaps are up 175bp in September after rising 191bp in the previous month, and the pull back in the interest outlook may continue to weigh on the exchange rate as investors scale back long-expectations for higher interest rates.
Expectations for a 0.2% rise in the GDP favors a bullish outlook for the Australian dollar, and price action following the growth report could set the stage for a long aussie-dollar trade as the economic outlook improves. Therefore, if the economy expands 0.2% or greater in the second quarter, we will look for a green, five-minute candle following the event to confirm a buy entry on two-lots of AUD/USD. Once these conditions are met, we will place our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, the downturn in business spending paired with the slump in global trade is likely to drag on economic activity going forward, and a dismal GDP reading is likely to drag on the interest rate outlook as the RBA maintains dovish policy stance. As a result, if the growth rate unexpectedly falls 0.2% or greater from the first three-months of the year, we will favor a bearish forecast for the Australian dollar, and will follow the same strategy for a short aussie-dollar trade as the long position mentioned above, just in reverse.
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