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Expectations are very low for Australia’s Q1 GDP: a first contraction of the economy in over two years. This broad measure of the economy will rock the Aussie on any result. Here are the details and 5 expected outcomes for AUD/USD.

Published on Wednesday at 1:30 GMT.

Indicator Background

Australia’s economy never went into a recession after the financial crisis broke out in the fall of 2008. Australia encountered only one quarter of contraction, in Q4 2008, and immediately returned to growth, sooner than other advanced economies.

This is expected to change in the first quarter of 2011. The main reason for a squeeze is the natural disaster in Queensland. The floods that hit wide areas lasted for a long time and significantly hurt economic activity.  

Evidence of a slowdown was seen in the housing sector, that saw significant squeezes. Weakness was also seen in the unofficial PMI-like figures from AIG – their score was lower than 50, for most sectors almost all the time.

The slowdown of China, which has also seen lower manufacturing PMIs during this quarter also add to the fears. China is Australia’s main trade partner.

The current consensus is for a contraction (or negative growth if you wish), of 0.3%. There are whispers for a significantly lower figure though.

Sentiment and Levels

Contrary to the low expectations, the sentiment is currently positive for the Aussie: the fresh hopes for Greece push the US dollar lower across the board, and are likely to continue.

Technical levels from top to bottom: 1.1021, 1.0935, 1.0850, 1.0775, 1.07, 1.0580, 1.05, and 1.0440.

5 Scenarios

  1. Within expectations: -0.3% to -0.6%: In this scenario, the pair is likely to shake quite a bit, but not break below support or above resistance.
  2. Above expectations: -0.2% to 0%: A smaller contraction that expected and much smaller than whispered will boost the Aussie and can send the pair above one resistance level.
  3. Well above expectations: +0.1% or higher: No contraction whatsoever will be very good news for Australia and will show the immense strength of the Australian economy. A break above two levels of resistance is possible.
  4. Below expectations: -0.7% to -0.9%: A significant contraction, at the feared numbers will be bad news for Australia. A drop below support is likely in this case.
  5. Well below expectations: -1% or worse: Significant contraction can send the pair to break below one level of support and to challenge another one.

For more on the Australian dollar, see the AUD/USD forecast.