Three AUD Trades That Could Make You Pips

A look at three key risk events for AUD and an overview of the week beginning 4th June.
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In this article, we will review this week’s most market-moving risk events. We will be particularly focused on AUD due to the release of several key Australian events.

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 with three potential trading opportunities:

  • The first trading opportunity for AUD will be from Australian Retail Sales.
  • The second trading opportunity will be from the RBA’s June policy decision. This has the potential to not only move AUD in the short-term but also shape its fundamental outlook.
  • The third trading opportunity will be from Australian GDP. This event also has the potential to influence AUD’s fundamental outlook.

Monday, June 4th

AUD – Retail Sales

The first opportunity of the week will come from Australian Retail Sales for April. Market consensus is for a print of 0.2% compared to March’s 0.0%.

Of this week’s three AUD opportunities, this will likely be the least significant. This is because Retail Sales is the least influential to AUD’s fundamental outlook.

With that said, Retail Sales has tended to deviate quite significantly in the past. Therefore, the opportunity here will be catching any strong deviation from expectations.

A significant positive deviation should see AUD strengthen. In this scenario, we would consider a short-term AUD long position.

Conversely, a significant negative deviation should see AUD weaken. This would provide a short-term short position.

The above chart shows a comparison of Retail Sales expectations and the actual data.

GBP – Construction PMI

UK Construction PMI follow’s Friday’s Manufacturing PMI and precedes Tuesday’s Services PMI.

Friday’s Services PMI for May printed at 54.4 versus market consensus of 53.5 and April’s 53.9.

According to City Index, however, the report was not as positive as the headline suggested. New orders slipped to 11-month lows, and activity resulted from producing goods, not completed orders.

Nevertheless, the market focused on the positive headline, supporting GBP across the board.

A positive Construction PMI could support GBP and see the positive sentiment continue. On the other hand, a disappointing report could see GBP weaken and pare its Friday gains.

If the report prints as expected, we would see no clear bias for GBP and turn our attention to Services PMI.

Tuesday, June 5th

AUD – RBA Monetary Policy Decision

The RBA’s June monetary policy decision will likely be the highlight of the week. This event will provide our second AUD opportunity and help shape our fundamental outlook.

According to ASX, the market is pricing in a 100% probability that the RBA remain on hold at this meeting.

While of the 50 analysts polled by Reuters, 49 expect the RBA to remain on hold while 1 expects a cut.

With the RBA expected to remain on hold, the market’s focus will be on the accompanying statement.

Current expectations are for the RBA to remain on hold until late Q1 2019. They are then expected to begin gradually hiking rates, taking the Cash Rate to 2.00% by 2020.

Any change from the RBA’s neutral tone could influence rate hike expectations and AUD.

A hawkish tone should support AUD, especially if the market brings forward its rate hike expectations. This would improve AUD’s fundamental outlook and provide an AUD long opportunity.

If the RBA are dovish, however, AUD is likely to weaken and rate hike expectations could get pushed back. This would see AUD weaken, providing a short opportunity.

Of course, if there are no changes to the RBA’s statement, AUD’s fundamental outlook will remain unchanged. This will likely mean that there will be no high conviction trading opportunity.

GBP – Services PMI

Services PMI is the final UK PMI release and arguably, the most important. This is because the UK’s services sector accounts for almost 80% of UK GDP according to the ONS.

Market consensus for May is for a print of 53.0 compared to April’s 52.8.

Services PMI has remained in expansionary territory since July 2016. However, since peaking in December 2016, it has been gradually edging lower.

A disappointing report, especially one below March’s 51.7 would be particularly negative. This would likely see GBP weaken across the board, providing a short opportunity.

If the report is positive, however, GBP will likely remain supported. Especially if Monday’s Construction PMI was also positive.

This would likely provide an excellent GBP long opportunity.

The above chart shows UK Services PMI’s performance since peaking in December 2016.

Wednesday, June 6th

AUD – GDP

GDP is another key 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 final high conviction opportunity of the week 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.

The above chart shows a comparison of Employment Change expectations and the actual data.

Summary

With several key Australian risk events scheduled for this week, there should be some great opportunities to trade AUD.

However, there could also be some great opportunities from UK data and Canadian data too.

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

However, as there are several events from Australia and the UK, you could use one event to trade into the next.

For example, you could consider holding an AUD trade from the RBA into GDP.

Furthermore, if all Australian or UK data deviates in the same direction, this could create a very clear sentiment bias. Such scenarios would make for excellent trading opportunities.

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, please type your question in the comments below.

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