• Australian GDP to contract 6% QoQ in the second quarter.
  • The RBA expanded term lending facility, kept rates steady.
  • AUD/USD overbought but ‘Buy the fact’ on worst contraction since 1929?

Following a modest 0.3% decline in the March quarter, the Australian economy is set to witness the deepest contraction since World War 2 in the three months to June, entering a technical recession amid the coronavirus pandemic induced regional lockdowns.

According to Gross Domestic Product (GDP) report due to be published on Wednesday at 0130 GMT, the Australian economy is expected to show a record 6% contraction n the second quarter (Q2). On an annualized basis, the GDP is likely to have shrunk by 5.3% vs. a 1.4% growth seen in the first quarter.

"Australia is being hit by an economic shock like no other,” Treasurer Josh Frydenberg told ABC's Insiders program on Sunday.

Currently, Australia’s second-most populous state of Victoria is grappled by the second wave of the virus, with Melbourne the worst-hit. The country’s second-largest city has been under several restrictions including an overnight curfew, while all non-essential businesses remain closed until at least September 13.

Victorian Premier Daniel Andrews announced that he would release a "roadmap" next Sunday for a gradual reopening, adding that “there was no economic benefit to pushing a plan ''too fast'' and then being forced back into restrictions.”

RBA keeps rates steady but delivers a dovish surprise

At its monetary policy meeting on Tuesday, the Reserve Bank of Australia (RBA) left the Official Cash Rate (OCR) unchanged at a record low of 0.25%. The OZ central bank, however, delivered a dovish surprise by expanding the size of its term funding facility to around AUD200 billion at 0.25% for three years.

“The Board will maintain highly accommodative settings as long as is required and continues to consider how further monetary measures could support the recovery,” Governor Philip Lowe reiterated in a post-meeting statement.

The dovish surprise by the RBA could be seen as a pre-emptive measure to support the economy, given the worst contraction expected since 1929.

AUD/USD Technical outlook

Heading into the Australian GDP release, the AUD/USD pair is consolidating the rally to the highest levels since August 2018, reached above 0.7400 earlier this Tuesday. The major has mainly benefitted from broad-based US dollar sell-off in the aftermath of the dovish Fed and recent gold-price surge towards $2000. The RBA policy decision had little impact on the aussie dollar. Although markets took it as an excuse to book profits on AUD/USD after the rally to two-year highs and amid overbought conditions on the technical charts.

As observed on the four-hour chart, the spot is trending in a potential pennant pattern while the Relative Strength Index has pulled out of the overbought territory, with more scope to the upside. It’s also worth noting that the price trades above all the major Simple Moving Averages (SMA).

Therefore, the aussie remains poised to extend the bullish momentum towards the August 2018 high of 0.7454. An economic shock is already priced-in and ‘buy the fact’ trading could play out on an in-line with expectations reading. However, a bigger-than-expected contraction could negate the near-term upside bias, dragging the pair towards the critical 0.7340 support, the confluence of the 21-SMA and Monday’s low.

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