Aussie Services Remain Contractionary, Yet RBA Decision Still Key
THE TAKEAWAY:
Australia’s AiG Performance of Services Index (MoM) for April saw its biggest drop in a year falling to 44.1 from its near expansionary level of 49.6 in March. This marks the 15th straight month of contractionary levels for the index, indicating that Australian services continue to struggle. The Australian dollar did not show significant movement following the data release.
While the AiG services report continues to show a bleak picture for the services industry in Australia, the currency is likely to remain unaffected by the data release over the short term. Continual risk-on sentiment by investors, marked by new highs in the S&P, will likely push investors towards Aussie’s high yield. As a result, investors should be focused on the upcoming RBA rate decision set for May 7th. Currently Bloomberg survey estimates predict that the RBA will maintain the cash target rate at 3.0%. Meanwhile, however, the market is assigning a 54% probability of 25BP or greater rate cut according to the Credit Suisse Global Overnight Index Swaps Directory. A cut from 3.0% rate could potentially drive high yield investors away from the Aussie currency towards other risky assets, such as equities. Should this happen it may in result lower demand and a subsequent drop in Aussie value.
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