Aussie Dollar Edges Lower in London Despite Strong Capex Data

A strong private sector capex report did little to support the Aussie dollar Thursday although the currency has gained strongly already in 2017.

The Australian dollar edged lower during early trading in London Thursday despite despite the second quarter capital expenditures report having shown investment by Australia Inc strengthening further during the period.

Private sector capex rose at a rate of 0.8% to A$114.3 billion in the second quarter, far ahead of the 0.2% consensus estimate of economists, while marking a second consecutive increase in the measure.

“We appear to be nearing the end of the downturn in mining investment and today’s data underscores this view. It means the drag on the economy from the mining investment downturn is lessening,” says Besa Deda, chief economist at St George Economics.

Apart from pointing to a firming of mining investment, Thursday’s data offers a glimmer of hope that private sector business investment may be able to pick up some of the slack from a slowdown in residential real estate activity, according to Deda.

Nonetheless, after a strong run in the year to date, the Australian dollar weakened against many of its G10 counterparts, retaining an edge only over other commodity currencies such as the Kiwi and Canadian dollars.

The pound to Australian dollar exchange rate edged higher early in the London session, with bids and offers accepted around the 1.6375 level, which implies an Australian dollar to pound sterling exchange rate of 0.616 pence.

The Australian dollar to US dollar exchange rate was a fraction weaker at the beginning of the London session, with the pair changing hands at 0.7900 on the nose, representing a 0.06% loss.

“Outside of mining, a lasting recovery in business spending might finally be starting to emerge. It is reflected in the ongoing lift in capex for both manufacturing and other selected industries and is also reflected in the improvement to spending plans for 2017/18 in these industries too,” Deda wrote in a note to clients.

The capex report comes after a series of mixed data points from the Australian economy and ahead of the Reserve Bank of Australia’s latest cash rate decision on Monday next week and Australia’s GDP number for the second quarter.

“We have rounded up our forecast for Q2 GDP growth to 0.7%qtr, 1.6%yr, edged up from 0.6% qtr. This reflects the upside surprise from equipment spending, plus also an awareness of labour market strength in the quarter, with hours worked up 1.2%,” says Andrew Hanlan, an economist with Westpac.

Like central banks across many other commodity exposed economies, the RBA has cut Australian cash rate progressively since 2012 in response to a turn in the commodity cycle, with the benchmark falling from 4.75% to 1.50% today.

The consensus forecast among analysts, economists and strategists is that the RBA holds the cash rate steady at 1.50% on Monday.

“If the RBA remains firmly on hold, as we expect, and the US dollar rises on tighter Fed policy, then AUD/USD could fall to 0.76 by year end,” says Imre Speizer, a markets strategist with Westpac.

Australia’s currency has given ground to the bulk of its G10 rivals in August thanks to a sideways movement in iron ore prices and geopolitical tensions stemming from persistent sabre rattling by North Korea.

However, it has gained strongly for the year to date, as its own as well as China’s economy have remained on even keels throughout the first half.