Strong Start for Australian Dollar, Outlook Dominated by Heavy Data Docket

The Australian Dollar is back on top of the G10 leaderboard at the start of what promises to be a busy week for the currency with positive momentum carrying it forward.

The initial kick higher in the currency comes following the release of an impressive set of Business Indicator data from the Australian Bureau of Statistics in which it shows Australian companies are running record profits.

The ABS reported profits rose 20.1%, well ahead of the 8.0% forecast by economists. 

The boost was due to temporarily higher commodity prices and export volumes and came after subdued growth in profits in the September quarter.

However, there are concerns that the profits have come at the expense of business investment and wages confirming the domestic scene picture to be mixed, and it is because of this that we can’t assume the Aussie will maintain its current stature.

Financial markets focused on fourth quarter 2016 Capital Expenditure outcomes and plans (published on Thursday) which confirmed soft investment intentions in Australia.

The fifth estimate for 2016/17 spending plans came in modestly stronger than expected and implies an upgrade on the fourth estimate published three months ago.

Total capex fell by 2.1% in fourth quarter to be 15.5% below a year ago.

This outcome was weaker than the market consensus expectation of a 0.5% QIV capex increase.

We also learned last week that discussions were had  at the Reserve Bank of Australia in their February meeting on the surprising 0.5% contraction in real GDP for the third quarter of 2016.

Officials account that the decline was due to short-term factors such as bad weather, which had a strong impact on the construction sector, and on the coal supply weakness.

“The fundamentals of the Australian economy is clearly mixed and it is difficult not to be concerned. For example, the levels of household debt is standing at record high and this supports our bearish view on the Australian dollar,” says Peter Rosenstreich, an analyst with Swissquote Bank in Gland, Switzerland .

Swissquote believe the low cost of money is also providing continued upside pressures on house prices. “The other side of the coin is that it pushes investors to take on more risk. As a result we consider that the Australian economy may already be in a vicious circle.”

“The private new capital expenditure has weakened by 2.1% for the last quarter of 2016 while the consensus expected a slight decrease of 0.5%. This confirms our bearish view on the AUD against the greenback,” says Rosenstreich.

However, the continued appreciation in commodities is another major factor in the Australian currency's strength as a large slice of its exports are made up of commodities.

Iron ore is the country’s largest single export and it has risen in price to $94 per tonne from previous levels of $60 in the summer of 2016, and this too has supported the currency.

Westpac’s FX Strategist Sean Callow thinks prices will probably continue rising and therefore will likely prove supportive to the currency.

“Spot iron ore prices this week reached highs since August 2014 around $94/tonne and seem likely to break $100 soon,” says Callow in a note to clients dated February 23.

Callow believes the Australian Dollar should continue to dominate rivals for some time yet.

Data to Watch in the Week Ahead

The coming week will be very congested in terms of the domestic data flows which could influence trade in the Aussie Dollar.

We have already seen the release of fourth-quarter business indicators which includes company profits, employee compensation and inventories.

Markets had been forecasting Company Gross Operating Profits to read at 8.0% but instead got a whopping 20.1%.

“Higher commodity prices should give some boost to company profits over Q4, although soft private domestic demand may be a negative offset. The business indicators will feed directly into our GDP forecasts,” says Joseph Capurso, Senior Currency Strategist at Commonwealth Bank Australia in a briefing to clients.

The fourth-quarter balance of payments (including net exports) data and fourth-quarter public spending numbers due out on Tuesday (28th February at 00:30 GMT).

“We expect to see a sharp narrowing in the Q4 current account deficit to around $5.5 billion on the back of firmer commodity prices and increased resource export volumes over the last quarter of 2016,” says Capurso.

Markets forecast the current account deficit to be -3.6BN.

Commonwealth forecast net exports to make a solid positive contribution of 0.7ppts to fourth-quarter GDP growth after being a major drag on Q3 GDP.

The big release comes on Wednesday March 1 when GDP data for the fourth-quarter 2016 is released.

Markets are forecasting a read of 0.7%, up on the previous quarter’s contraction of 0.5%.

However, based on the available partial numbers to date, CBA see GDP growth of around 0.8% when the data hits the deck on Wednesday.

Such a quarterly outcome would leave annual growth at 2%, up a tad from the 1.8%pa growth rate posted in third quarter.

On Thursday March 2 at 00:30 GMT, the latest ABS monthly prints of international trade and building approvals are due late week.

There are also updates on monthly ANZ job ads and CoreLogic house prices.

The trade balance ballooned into a large surplus of $3.5bn in December.

Consensus sees a larger trade surplus of $3.8bn in January.

“Higher commodity prices and exports should lift exports again and far outpace imports in the month, thanks partly to a stronger AUD,” says Capurso.

Commonwealth Bank expect a fall of 2.5% in the very volatile building approvals series in January after December’s modest 1.2% increase. This would see approvals down by 131⁄2% on a year ago.

The multi-unit (or apartment) approvals segment is the key source of volatility in the series.

On the monetary policy front, the March RBA Board meeting will not be held until the 7th March (the week after next) and at this meeting we should see the Bank leave policy settings steady at 1.5%.