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Forex: AUD/USD Direction Dependent on CAPEX

Posted by Akhilesh Ganti on Feb 25, 2014 10:36:00 PM

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For some time now the RBA has been quite vocal about "converting" the Australian economy from one that was overly dependent on mining growth to one that was more balanced. This dependence, and the subsequent contraction in the mining sector, has been the prime reason for the Australian economy stagnating.

To combat this the RBA embarked on its now well documented easing policy to try and stimulate "new" business ventures and also to weaken the AUD/USD from its lofty perch. They were successful in achieving the latter as the currency plunged from its 4/7/2013 high of 1.0582 to its current low of 0.8660 (WEEKLY chart on left - click to enlarge ). As to whether they have successfully stimulated the economy still remains to be seen and tomorrow's release of Q4 Capital Expenditure (CAPEX) will go a long way in determining that.

What to look for:

While this is a survey, business intentions are always an integral component in forecasting future economic growth and one of the ways to gauge this would be through their expectations for capital expenditure. The 2013/2014 CAPEX estimates will probably not see much change from their previous readings, which had shown an upgrade to non-mining expenditure, and the consensus is for this to come out at AUD$ 166 Billion. What will likely garner more attention from the market are the estimates for 2014/2015 and these range from AUD$ 133 to 139 Billion. The RBA expects mining CAPEX to decline so it is imperative that non-mining CAPEX experiences a sufficient enough rise to offset the former's drag on GDP.

Since making its lows at 0.8660 on 1/23/2014, AUD/USD has appreciated about 400+ pips aided to a large degree by the RBA's decision to adopt a neutral stance with regard to their near term monetary policy initiatives. This rebound has stalled at the 38.2% retracement level of the down move from 0.9757 to 0.8660 which comes in at 0.9080. Since then it has been consolidating within a 150+ pip range [0.9080 to 0.8930] as it looks for a catalyst to either resume its march higher or revert back to the longer term bearish trend after what would be viewed as the end of its corrective phase. The CAPEX data just might be this catalyst.

A better number, especially a favorable split between mining and non-mining, could see the AUD/USD ratchet higher as it breaks through the 0.9080/90 resistance zone and potentially target initial resistance at 0.9168. A clear breach of this would shift the focus to the 200 DMA, currently at 0.9191, and the 50% retracement level at 0.9208. Conversely, a weaker number would likely see the pair target initial support at 0.8910. A breach of this would embolden the bears to renew their assault on the beleaguered currency and bring the possibility of new lows to the fore.

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(click to enlarge)


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