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Short the AUD on bad GDP?

Discussion in 'Jarratt Davis- Trading Signals' started by Jarratt Davis, Jun 5, 2018.

  1. Jarratt Davis

    Jarratt Davis Special Consultant to the FPA

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    Today, we will review the remaining two most market-moving risk events of the week, the Australian GDP and the Canadian Employment data. We will be particularly focused on AUD due to the release of several key Australian events.

    Economic data back in focus after political uncertainty surrounding Italy eases

    Last week, the market’s focus was on political uncertainty in Europe. This followed reports early in the week that Italy could seek a snap election.

    According to Bloomberg, reports suggested elections could take place as early as July. The announcements resulted in a sell-off in Italian assets and Italian bonds.

    Furthermore, EUR fell across the board along with ECB rate hike expectations.

    However, on Thursday, Italy’s President and Prime Minister-designate had come to an agreement.

    Italy’s new Prime Minister, Giuseppe Conte was sworn in on Friday, ending three months of political turmoil, as reported by CNN.

    With concerns over Italy easing, this week should see the focus turn back to economic data. This is particularly true for AUD where Monday saw Retail Sales released, followed by the RBA Rate Decison overnight.

    The Australian Retail Sales data for April was overall positive, printing at 0.4% M/M versus market consensus of 0.2% and March's 0.0%

    This morning, the RBA left rates unchanged at 1.50% as was widely expected.

    In the accompanying statement, the RBA reiterated that policy is consistent with sustainable economic growth and reaching the inflation target.

    With the RBA remaining on hold and nothing too surprising from the accompanying statement, AUD was little changed following the RBA's policy decision.

    Wednesday, June 6th AUD – GDP

    GDP is the third and final event which has the potential to influence AUD’s fundamental outlook. It will consist of two data points, GDP Q/Q and a GDP Y/Y.

    Market consensus is for an overall positive GDP report with GDP Q/Q expected at 0.8% and GDP Y/Y expected at 2.7%. This compares to Q4 2017’s readings of 0.4% and 2.4% respectively.

    GDP printing above expectations would suggest a particularly strong recovery from Q4 2017. This would likely support AUD and maybe even improve rate hike expectations.

    A print below expectations would likely weigh on AUD. Especially if the data prints below Q4 2017’s 0.4% Q/Q or 2.4% Y/Y.

    If GDP does slow from Q4 2017, we would expect the market to push back rate hike expectations. This would likely provide an excellent AUD short opportunity.

    Friday, June 8th CAD – Employment Report

    The second high conviction opportunity in the following days will be Canada’s employment report.

    This report will consist of two components, the Unemployment Rate and Employment Change.

    Of the two, the initial reaction will likely come from Employment Change. This is because this component tends to deviate quite significantly from expectations.

    Furthermore, we can analyse Employment Change in greater detail through Full-Time component. This means the report can be misleading if Full-Time contrasts with the headline.

    For this reason, we want any deviation in Employment Change to be a result of Full-Time Employment.

    Regarding the Unemployment Rate, any significant deviation from expectations will likely influence CAD. However, this too could create volatility if it contrasts with the Employment Change.


    Summary

    The above risk events present us with some great opportunities to trade the AUD and the CAD.


    We would consider all of these events significant enough to trade out of on a strong deviation.

    The goal of this article is to help you improve your understanding and ability to trade risk events.

    If you would like to learn more about risk event trading, feel free to post your questions below.
     
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