FOREX NEWS: Australian Economy Dissapoints, Trouble for the Aussie?


THE TAKEAWAY: Australia’s AiG Performance of Construcion Index (Jan) came in lower than expected> As the Australian economy continues to struggle, the chance of RBA action increases > Fears of such action should continue to put pressure on the Australian Dollar

Australia’s AiG Performance of Construction Index (Jan) came in lower than expected at 36.2 versus estimates of 38.8, indicating continual struggles for the Australian economy. The report marks the 32nd consecutive month of contraction within Australia’s construction sector and comes on the heels of Australia’s Retail Sales Report (Dec.), which also disappointed at -0.2% growth versus estimates of 0.3%. The Australian dollar did not show major reaction following the construction data release, but has faced significant downward pressure over the last few days.

As Australia’s economic data continues to disappoint, the probability of the RBA taking action should continue to rise. Following AiG’s Performance of Construction Report, the market greatly increased its estimates of the probability of a rate cut by the RBA, according to Credit Suisse’s Overnight Index Swaps Directory. Based on this Index, the implied chance of a 25BP rate cut by the RBA increased from 2% to 51%, after the AiG report. As the liklihood of the RBA pursuing dovish monetary policy grows, investor's fears of AUD depreciation should increase, potentially putting negative pressure on the AUD against its peer currencies. Furthermore, any fall in AUD, could be compounded by a decrease in investor risk sentiment, which may push investors further way from investment currencies.

AUD/USD (5 Day Chart)

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