AUD/USD: 0.96 Holding Despite Weaker Than Expected GDP

Q1 GDP for Australia came in at 0.6% vs an expected 0.7%, while this figure is slightly disappointing, it is on par with previous quarter’s results of 0.6%. The real disappointment was in the Y/Y figure, which showed a 2.5% vs a 2.7% expectation. It is also a huge fall vs last quarter’s 3.2%. Certainly Australia’s economy is still growing, but the rate of growth is slowing down significantly as compared to previous years. This in itself is not something new, and is widely reported and expected – but apparently the actual pace of slowing down may be a little bit faster than expected. Couple this with the expected slowdown in China, things are not expected to pick within the next 1-2 years.

Ahead of the GDP data, the Australian Industry Group gave us a foreshadowing of the bad news ahead, with its AIG Service Index (released 2 hours before GDP) for the month of May coming in at 40.6 versus previous 44.1, with 50.0 being the par level. On top of this, this is the weakest print in 12 months, suggesting that the pace of shrinkage is increasing.

Hourly Chart
AUD/USD_1" title="AUD/USD_1" width="580" height="403">
It is not all bad news though, as price managed to stay above 0.96 despite the bad GDP number. Price was already moving towards 0.96 after failing to break the 0.965 interim resistance, and one would be forgiven to think that the worse than expected GDP print would be able to send price below 0.96 easily, or at the very least test it in a meaningful manner. Currently price is trading above the pre-GDP announcement levels, underlining the strong underlying bulls that has pushed price much higher on Monday. Bulls did not do it alone though, with China HSBC Service PMI coming in at 51.2, slightly better than the previous month’s 51.1.

From a technical perspective, Stochastic tell us that 0.965 will be a tough nut to crack. Stoch readings have peaked just today, just when 0.965 was being tested. This stoch peak is also close to the interim peak/troughs found on 30th and 31st May, suggesting that Stochastic readings have its own “resistance” to work out. Currently Stoch line is crossing the signal line, hinting that a push up above 50.0 is possible for Stochastic, and that may hopefully break 0.965 on the chart this time round. If 0.965 holds, the possibility for a move back towards 0.96 and possibly below becomes higher, and we may even see acceleration lower especially if price breaks Monday opening levels.

Daily Chart
AUD/USD_2" title="AUD/USD_2" width="580" height="402">
From the Daily Chart, price has entered the descending channel, with Channel Top a potential bullish target. However, the possibility of trading higher towards 0.98/confluence with Channel Top depends highly on the ability of price to rebound from current Channel Bottom. Stochastic readings suggest that it is possible with a bull cycle underway, but it is also facing a “resistance” of its own around 50.0 similar to the Stoch line in Hourly chart. With the strong overall bearish trend currently in play, there is also a chance that price may simply straddle the Channel Bottom lower without bouncing higher. This does not mean that price will not seek Channel Top eventually, but that price may be severely lower when Channel Top is tested, as opposed to the scenario where price move higher and challenge Channel Top right now.

Fundamentally wise, the improving China Service PMI number has little long term impact on Aussie economy as it is merely an indication of the Service sector in China, which does not require nor consume any imports from Australia. Instead, the more important number is the Manufacturing PMI which was released last week, coming in at 49.2, falling from previous month’s 50.4. However it is nonetheless interesting to see AUD/USD rallying on Monday despite the depressing Manufacturing PMI number which was released on Saturday, suggesting that there are bulls lying in wait for bargain buys.