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- The Australian economy is seen growing by 0.7% in the first quarter of 2022.
- RBA says the Australian economy is resilient, remains upbeat on the outlook.
- AUD/USD has limited upside potential even on an Australian GDP beat.
AUD/USD is testing bearish commitments near monthly highs in the run-up to the first quarter Australian GDP release due this Wednesday at 0130 GMT. The South Pacific Island nation’s economic activity is likely to be hit at the beginning of the year, courtesy of the Omicron covid variant outbreak and severe flooding in New South Wales (NSW) and Queensland.
The Australian economy is seen expanding by 0.7% in the three months to March, on a quarterly basis, after rebounding by 3.4% in the final quarter of 2021. Meanwhile, the country’s GDP rate is seen dropping to 3.0% YoY in the reported period vs. a 4.2% sharp expansion witnessed in the previous quarter. Australia's economy staged a solid turnaround last quarter as the country emerged from its most stringent pandemic lockdowns.
Q1 GDP unlikely to alter RBA’s hawkish stance
Despite the impact of the further disruptions, accounting for a rocky start to the year, the Australian economic performance for the quarter ending March is unlikely to be viewed as how the economy could perform for the entire year.
The economic damage due to the severe floods and the Omicron wave is likely to be a one-off event. This view is also endorsed by the Reserve Bank of Australia (RBA), as cited in the updated forecasts in May’s Statement of Monetary Policy, “the Australian economy remains resilient and is expected to grow strongly this year. GDP is forecast to expand by 4¼ percent over 2022. Growth is expected to moderate thereafter, to 2 percent over 2023.”
For the first quarter GDP outcome, there is little scope for an upside surprise, as Australia’s current account surplus shrank to A$7.5 billion ($5.38 billion), well short of the forecast of A$13.4 billion. Net exports are expected to subtract 1.7 percentage points from GDP in the first quarter.
On the other hand, Australian government spending jumped 2.5% in the March quarter and will make a 0.7 percentage points contribution to economic growth in the quarter. However, the net impact is likely to remain a minus for the country’s national accounts.
Even as Australia experiences a meager growth, it is unlikely to alter the RBA’s hawkish shift on the monetary policy stance. The country’s solid labor market, pent-up consumer demand and elevated household saving ratio continue to paint a rosy picture of the economy for this year.
Markets are pricing in another 0.25% rate hike to 0.60% at the RBA's June policy meeting next week, followed by a string of hikes to bring the OCR to around 2.5% by the end of the year.
The central delivered a hawkish rate hike of 25 basis points (bps) to 0.35% as it prioritized battling the inflation monster, which reached a two-decade high of 5.1% in the first quarter.
Trading AUD/USD with Australia’s GDP report
The recent downward correction in the US dollar from 20-year highs has helped AUD/USD hit the highest level in four weeks just above 0.7200.
A dense cluster of healthy resistance levels aligns near the 0.7240 region, which could cap the renewed upside in the aussie if the Australian GDP print beats estimates.
In case, the GDP rate disappoints or comes in line with expectations, the immediate support at 0.7130 could be tested. A big downside surprise could expose Friday’s low of 0.7084
Note that the aussie’s reaction to the Australian GDP report could be also impacted by the prevalent broader market sentiment and the US dollar price action.
AUD/USD: Daily chart
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