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Australian Dollar (AUD) Exchange Rate Focus: Aussie Services PSI Rockets

05 January 2017 by News Desk

The Australian dollar enjoyed some support in Oceanic trading after a surge in the Australian Industry Group’s (AIG) latest performance of services index (PSI). The PSI jumped by 6.6 points in December to reach the highest level since May 2007 at 57.7, say industry experts FC Exchange.

Australian Service Sector Gets a Boost – AUD Stable

The Australian services sector ended 2016 on a high as any number above 50.0 is registering growth – the higher the number the swifter the expansion. What’s more, all five activity sub-indexes remained above 50.0 with sales rocketing by 14 points to reach 62.1 in December.

The AIG report read: ‘A number of respondents to the Australian PSI noted that conditions were more positive in December with: customer demand strengthening; increased orders from the mining sector; a lower value for the Australian dollar; interest rates remaining stable and (for regional services) good agricultural harvests. Overall there was a sense of increased confidence from respondents across many services sub-sectors.’

However, despite the positive news, the Australian dollar to US dollar (AUD/USD) exchange rate failed to improve in Thursday’s North American session and has instead been trading within a tight range.

US Dollar Falls as Investors Assess Federal Reserve Minutes

The Federal Open Market Committee (FOMC) released its latest meeting minutes in Wednesday’s stateside trading, with the effect spilling into Thursday’s session. This caused the buck to weaken versus the pound (USD/GBP), Japanese yen (USD/JPY) and Chinese yuan (USD/CNY). The greenback exchange rate remained in a tight range against the Euro (USD/EUR) and Australian dollar (USD/AUD).

The reason for the US dollar weakness came with the release of the minutes which stated that the strength of the currency could be a down-side risk leading to stricter financial conditions which could result in restricted economic activity and inflation – something which may ultimately postpone rate hikes. While the minutes said that rates had been increased in December due to forecasts that the nation’s economic expansions would be bolstered by the new US president, they still remain cautious about upgrading overall GDP growth in 2017.

The minutes read: ‘Most participants attributed the substantial changes in financial market conditions over the intermeeting period — including the increase in longer-term interest rates, the strengthening of the dollar, the rise in equity prices, and the narrowing of credit spreads — to expectations for more expansionary fiscal policies in coming years or to possible reductions in corporate tax rates.’

If policies don’t live up to president-elect Donald Trump’s expectations, economic growth could be hindered.

Pound Recovering from Brexit Events

The pound exchange rate has suffered a rough week with Brexit developments causing losses, despite positive data. Thursday’s European trading allowed the pound exchange rate to claw back some of its losses from the week with two positive Markit purchasing managers index (PMI) readings. The UK services PMI rose from 55.2 to 56.2 in December, avoiding the predicted fall to 54.7. Meanwhile, the composite PMI also increased, this time from 55.3 to 56.7. The services PMI hit a 17-month high in the final month of 2016.

Chief Business Economist at IHS Markit, Chris Williamson, commented: ‘A buoyant service sector adds to signs that the UK economy continues to defy widely-held expectations of a Brexit-driven slowdown. The faster growth of services activity follows similar news of improvements in the manufacturing and construction sectors at the end of 2016.’

However, in the broader economy, the Society of Motor Manufacturers and Traders (SMMT) has expressed concern that there may be a slowdown in car sales in 2017 as Brexit continues. According to the British Chamber of Commerce (BCC), a record number of British businesses have suggested that with sterling weakness taking hold, they may have to increase product prices to cover costs. The Brexit negotiations are likely to continue hindering the GBP exchange rate significantly.

 

Disclaimer: This economic update is provided by FC Exchange a Global Reach Group Company, industry leaders in foreign exchange. Authorised affiliates are permitted to reuse content.

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