Despite there being so much emphasis on the Q3 CAPEX numbers, the reaction in the currency space was quite tepid. Perhaps the 2.8% growth at the headline print kept the AUD bears at bay, given the 6.2% gain in equipment, plant and machinery will help future GDP reads. However, it must be said that ‘intentions’ of business spend have not met the market’s expectations, and we feel this may get the lion’s share of the attention from European traders later today. Firms have revised down their CAPEX estimate intentions to $173 billion, which is about a 5% downgrade from consensus and probably the biggest in multi-decades. The RBA will need to chew through the numbers and come to a decision on just how compelling the evidence is that the ‘boom’ has reached its peak, especially given worrying statistics projecting mining investment has fallen from 40% growth to 24%. Non-mining investment is hardly a source of inspiration either, but we feel the intentions for mining investment are probably the bigger issue for the bank.
So after this print, the slightly weaker wage data and forward indictors on employment, such as ANZ job ads suggesting future weakness in the labour market, we feel the balance of probability favours a rate cut in December. We still stick with the view that you can’t get outrageously bearish about AUD/USD at spot prices, given the RBA could easily look at the external factors that have been calming of late and keep rates at 3.25%, plus there are other forces at play for the pair than just interest rates. The Fed will embark on QE4 (i.e. a $45 billion per month purchase programme of US treasuries to replace its expiring ‘Operation Twist’ programme) in its December 12 meeting and this should keep USD bulls from really coming to the party. AUD/NZD has fallen below 1.27 on today’s numbers and we feel it a good pair to trade if you firmly believe the RBA has to cut, as it’s the purest play on rate expectations. A daily close below the November 23 low at 1.2681 would see us suggest short positions, although the 31.8% retracement of the October to November rally at 1.2657 may find solid buying support. A daily close below this retracement would suggest momentum favours further downside and we feel adding to shorts could be the way to go.
Given all the talk about foreign ownership of Australian government bonds being around 75%, we feel traders should also look at data showing foreign holdings of Australian bonds in Q3, released on the rates day (December 4). Q1 was when we saw the big diversification trade take fold, where global central banks bought great quantities of Aussie bonds due to the high yield and limited pool of AAA-rated securities. Any sign that banks have been net sellers of bonds in Q3 may see the AUD lower on the day. Given the position of yields at present and the strong participation in recent bond auctions, this doesn’t seem likely in our opinion.