THE TAKEAWAY: Service activity Falls to 40.6 in May from 44.1 previously > Australian economy cools and further RBA rate cuts more likely >AUDUSD BEARISH
Australia’s service sector cooled this past month according to data from AiG, adding another weight to an already troubled currency. The indicator printed a reading of 40.6 (anything below 50.0 reflects a contraction in the sector) versus 44.1 in the previous month. This was the lowest reading for the series since April 2012, while the sector has technically contracted every month since January 2012.
The service sector comprises about two thirds of the Australian economy while at least one fifth of GDP stems directly from commodities. Such a substantial segment of overall GDP carries far more weight in the overall assessment of the economy’s health for investors and monetary policy officials. The RBA has maintained a regime of consistent easing – having left the future open to further cuts as recently as yesterday – which is aimed at bolstering economic growth. This indicator does little to move the central bank off the path of accommodation. Furthermore, cooler growth and the threat of rate cuts discourages foreign capital investment – a serious burden for this ‘carry’ currency. In yesterday’s current account data, we learned that the foreign holdings of Australian government debt dropped to its lowest percentage since the 3Q of 2010.
Australian Dollar 5-Minute Chart
This particular service sector indicator has relatively limited historical influence on price action in AUDUSD – even though its economic implications are certainly significant. The further influence it has in pushing the RBA to further cuts or divestment from Aussie assets is limited. Further, we are likely seeing restraint ahead of the 1Q GDP data released soon after. Estimates currently forecast a 2.7% growth rate while any steep deviation from this number will lead to speculation of interest rate adjustments by the RBA.
Written by Gregory Marks, DailyFX Research Team
Written by John Kicklighter, Chief Strategist