TD Securities: The Capex Data Was Strong But GDP Is Still Being Downgraded

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The Aussie popped to 0.9372 this morning on the back of the much bigger than expected print of 1.1% for Private New Capital Expenditure in Q2. But it has so far run into a wall around this level which might be explained by some devil in the detail of this otherwise positive data.

Annette Beacher, TD Securities Head of Asia-Pacific Research, said in a note to clients that “The component that feeds into GDP—plant & equipment—fell -0.9%, lower than we expected, and as the capex outlook for 2014/15 remains benign, we recommend fading AUD strength”.

Indeed Beacher said that ahead of other partial indicators of Q2 GDP which will be released next week that TD will “shave down our Jun qtr GDP forecast from +0.7%/qtr to +0.6%/qtr. This outcome lowers annual GDP growth from 3.5% to 3.2%/yr, consistent with trend growth of 3-3¼% and our full-year estimate of 3.2%”.

Beacher included a chart from Access economics showing the Capex Cliff that is still coming and said:

With the big falls in mining capex looming, the RBA needs non-mining investment (and housing, consumption, trade) to ‘plug the gap’ and smooth out the transition. So far the swaps market is not entirely convinced that current monetary policy settings are appropriate with the non-zero risk of another rate cut priced by mid-2015.

The Aussie is still strong on the day and Kara Ordway market analyst at City Index told Business Insider that with the strength “primarily attributed to non-mining will likely cause the local unit to remain bid as we head into the afternoon session. Third estimate for 2014/15 intentions were also higher- which should reaffirm the current RBA policy when they meet next Tuesday.”

So some good news for Aussie dollar longs, not bad news for the economy but an economic transition that is still happening gradually – however, this data suggest it is happening.

Chart: VantageFX MT4

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