AUD/USD rally ends on soft Australian data and commodity slump

The faltering three-week rally in the AUD/USD concluded last week as it closed 0.58% lower at .6525, despite the US dollar index, the DXY, also losing ground.

The decline in the AUD/USD was prompted by softer-than-expected Australian inflation and retail sales data. This was compounded by an intensification in offshore headwinds, as crucial commodity prices, including iron ore, dipped, and the Reserve Bank of New Zealand (RBNZ) indicated a reduced likelihood of rate hikes and an earlier commencement of rate cuts, which sent the Kiwi dollar tumbling lower.

Adding to the pressures on the AUD/USD, data this week is expected to reveal that growth in Australia during Q4 2023 was below par amid subdued consumption and a significant drop in business inventories.

What is expected from GDP Q4 (Wednesday, March 6th at 11:30am AEDT)

Australian GDP grew by 0.2% in the September quarter of 2023 and 2.1% YoY. While this marked the eighth consecutive rise in quarterly GDP, it was deemed weak, as more typical GDP levels in Australia are nearer to 3%.

Within the details:

• Per capita GDP growth declined by 0.5% QoQ. This was the third successive quarterly fall in per capita GDP, also dubbed a “per capita recession.”
• The household saving-to-income ratio dropped to 1.1%, its lowest level since December 2007, as households tapped into accumulated savings to counter cost of living pressures.
• Government spending and capital investment were the primary growth drivers.
• Household spending remained stagnant as government benefits and rebates reduced household expenditure on essential services such as electricity.

This quarter (December or Q4), GDP is anticipated to grow by 0.2%, and the annual growth rate is expected to increase by merely 1.5%, offering further proof that economic activity has decelerated in response to higher interest rates. A negative quarterly figure on Wednesday is within the realms of possibility.

We anticipate that softer inflation, easing labour markets, and slower growth will lead the RBA to retract its tightening stance in June before implementing rate cuts of 25bp in August and November 2024.

AU annual GDP rate chart

AUD/USD technical analysis

In last week's article, we noted that the AUD/USD had struggled to overcome resistance coming from the 200-day moving average currently at .6560 and said

“The longer it spends lingering under the 200-day moving average, the more chance there is of a retest of the mid-February .6442 low with scope towards weekly support near .6310.”

The scenario above remains our base case, aware that the AUD/USD needs to see a sustained move above the 200-day moving average at .6560 and then above the mid-January .6625 high to negate downside risks and warn that a more robust recovery is underway.

AUD/USD daily chart

• ^{Source:Tradingview. The figures stated are as of 4 March 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}