Australian dollar dips on soft Capex

The Australian dollar has edged lower on Thursday, as AUD/USD trades just under the 0.7200 level.

Australian Capex slips

Australian business investment declined by 2.2% in October, weaker than the consensus of -2.0%. The business sector has been hit hard by Covid, and the extended lockdowns forced many businesses to close. Still, there was a silver lining, as spending expectations were revised upwards for the fiscal year 2021, pointing to resilient business confidence despite the downturn due to Covid.

As Australia emerges from the recent Covid wave, the government is moving quickly to open the country’s borders. This is no doubt great news for the services sector, which has been starved for tourists ever since the government shut the borders due to Covid. This also means that up to 200 thousand migrant workers will be allowed into the country. This could have significant economic ramifications, as wage growth, which had been moving higher, will fall due to the increase in the labor supply. The RBA has said that wage growth is one of its milestones for a hike in interest rates, saying that it will not raise rates prior to wage growth hitting 3%.

We continue to see a significant gap between RBA guidance and market pricing. Governor Lowe has stated that he will not raise rates until 2023 or perhaps 2024. The markets have ignored Lowe and have priced in three rate hikes for next year. Will something give? Lowe has pushed back against the market expectations, but with no success. There are two factors which can be pointed to in favor of raising rates sooner rather than later. First, inflation is moving higher, although it is still within the RBA’s target. Second, the Australian dollar is falling fast and is moving towards the key 70 level. The currency has endured a miserable month of October, falling 4.37%.

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AUD/USD Technical

• There are resistance lines at 0.7328 and 0.7422
• AUD/USD continues to test support at 0.7184. Below, there is support at 0.7134

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