The Aussie’s round trip – Westpac

Sean Callow, Research Analyst at Westpac, notes that the Australian dollar lacked direction in February, mostly chopping around 0.70-0.72.

Key Quotes

“Then on 2 March it found inspiration as Australia’s Q4 2015 GDP beat expectations with an eye-catching 3.0% y/y growth pace. As the data was released, AUD/USD was 0.7170 but it closed the day around 0.73 and within a week was pushing above 0.75. The rally would reach the low 0.78s by late April.

Of course since then 0.78 has been left in the dust as the Aussie has tumbled on Australia’s stunningly low CPI and the RBA rate cut inspired by the inflation surprise. This week AUD/USD was back to 0.7170 where the whole rally kicked off. The timing is rather neat as Australia’s Q1 2016 GDP is due on Wednesday.

At this point, the signs are for a similar quarterly rise of 0.6% but no repeat of the 3% y/y pace that helped stoke AUD optimism. Westpac looks for 2.7% y/y, at least ahead of data on e.g. net exports. Today’s business investment data did not change our economists’ forecast, with the near-flat reading on plant & equipment spending about as expected. Markets also focused on the investment intentions survey, which showed a glimmer of hope that economic rebalancing is underway. Total investment is seen at AUD89.2bn, -14.6% y/y, a little better than our AUD86bn estimate. The industry breakdown showed services investment plans up 2% y/y, with mining -32% y/y and manufacturing +14% y/y (off a low base).

Having soared to an extremely high share of GDP, mining investment was always going to fall heavily for a number of years so the RBA is likely to focus more on the 2% rise in investment plans in the services sector. A weaker AUD may be helping somewhat in this rebalancing.”