This week our currency strategists focused on the Australian Q3 GDP Report and its potential impact on the Australian dollar for potential high-quality setups.
Out of the four scenario/price outlook discussions this week, one discussion arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay. Check out our review on those discussions to see what happened!
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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AUD/USD: Monday – December 2, 2024
AUD/USD 1-Hour Forex Chart by TradingView
On Monday, our strategists had their sights set on Australia’s Q3 GDP report and its potential impact on the Australian dollar. Based on our Event Guide, expectations were for growth to pick up to 0.4% q/q from 0.2% previous, with markets looking for signs of economic resilience amid RBA’s hawkish stance.
With those expectations in mind, here’s what we were thinking:
The “Aussie Advance” Scenario:
If GDP came in stronger than expected, we anticipated this could reinforce the RBA’s hawkish stance on keeping rates “sufficiently restrictive.”
We focused on EUR/AUD for potential short strategies if risk sentiment was positive, especially given recent sentiment that we’ll see rate cuts from the ECB near term. In a risk-off environment, AUD/CAD long made sense given recent expectations that we may see a rate cut from the Bank of Canada and recent weakness in oil prices.
The “Aussie Avalanche” Scenario:
If Australia’s growth figures disappointed, showing continued weakness in consumer spending and trade, we thought this could fuel RBA rate cut expectations.
We considered GBP/AUD for potential long strategies if risk sentiment stayed positive, particularly given the BOE’s relatively less dovish stance on interest rate policies. If risk sentiment leaned negative, AUD/USD short made sense given the pair’s recent downtrend and the relative economic strength of the U.S., and interest rate advantage the U.S. has over the rest of the major economies.
What Actually Happened:
The Q3 Australian GDP report showed weaker growth than expected:
- The Australian economy grew by 0.3% q/q (vs. 0.4% q/q expected)
- Annual growth slowed to 0.8% y/y (vs. 0.9% y/y forecast)
- GDP per capita fell -0.3%, marking the seventh consecutive quarterly decline
- Household spending was flat at 0.0% following a 0.3% decline in Q2
- Terms of trade fell 2.5%, declining for the third straight quarter
Market Reaction:
This outcome fundamentally triggered our AUD bearish scenarios, and with risk sentiment turning cautious ahead of key U.S. data, AUD/USD became our focus.
Looking at the AUD/USD chart, we saw immediate selling pressure after the GDP release just below the Pivot Point (0.6497) area. The pair steadily declined through Asian trading, breaking below the S1 level (0.6445) as markets digested the weak household spending data and falling GDP per capita.
The downward momentum intensified during U.S. hours after Fed Chair Powell’s relatively hawkish testimony highlighting economic resilience and cautioning against rapid rate cuts.
By Friday’s close, AUD/USD had reached the S2 pivot support area(0.6381), thanks to U.S. employment update that showed some signs of jobs weakness, but not enough to crack the idea of a relatively strong employment environment.
The Verdict:
So, how’d we do? Our fundamental analysis correctly anticipated AUD weakness on disappointing GDP data, which materialized right after the actual numbers.
Our technical analysis suggested bearish momentum may form with sustained trade below the pivot point area, or to watch for bearish patterns after a bounce to the 0.6540 area. The former scenario played out,
If traders entered short positions after the weak GDP data near the Pivot Point, they could have captured a substantial move lower. Trade management would have been relatively straightforward given the clear downward momentum and technical levels providing guidance.
There was even an opportunity to play the break and retest of a strong support area at S1 pivot support area, that drew in sellers through the rest of the week.
For our Premium members, our risk team created a hypothetical trade structure to capture the bearish momentum a bit later after the release, with a net positive outcome thanks to the help of U.S. dollar strength after the Friday NFP report.
Overall, we think this discussion “highly likely” supported a net positive outcome as both fundamental and technical triggers aligned well, showing strong bearish momentum and reaching multiple support targets throughout the week.