SERVICE SECTOR ACTIVITY BACK IN EXPANSIONARY TERRITORY

Quiet trading has helped the Australian, New Zealand and Canadian dollars recover against the greenback. Australia was the only commodity producing country to report economic last night. Service sector PMI leaped from 39.9 to 50.2, the first month of expansion in more than a year. This healthy report confirms our belief that the Australian economy is outperforming all of its G20 counterparts. The main event risk for next week will be the Reserve Bank of Australia’s rate decision on Tuesday. The RBA’s meeting is probably one of the most anticipated central bank meetings at this point because their comments on the outlook for monetary policy and the economy could have a significant impact on the Australian dollar. Last month, the central bank warned that interest rates could still be reduced despite improvements in the economy. The economy has only strengthened further since then with retail sales rising for the third month in a row, manufacturing sector activity accelerating and the number of people falling off employment rolls decreasing. Building approvals were weak but hardly notable enough to offset the laundry list of good news. However for the RBA, there is no urgency to rush back towards tighter monetary policy. The global recovery is still fragile and strength of the Australian dollar could hurt earnings. There is more to lose if they turned hawkish one month and reverted back to dovishness the next. Therefore we expect the RBA statement to remain relatively unchanged. In addition to the RBA rate decision, Australia’s labor market report is due for release. Canada also employment numbers on Friday, but the focus in the beginning of the week will be on the IVEY PMI report. Oil prices have retraced significantly which is contributing to the weakness in the loonie. The New Zealand economic calendar on the other hand is devoid of any market moving data.