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Aussie Rally Faces Investment-Shift Challenge: Australia Credit

Australian Dollar
The Aussie dollar climbed 3.4 percent against a basket of major peers over the past month, the most among 10 currencies tracked by the Bloomberg Correlation-Weighted indexes, after RBA Governor Glenn Stevens signaled record low interest rates are helping the economy withstand a cooling mining boom. Photographer: Brendon Thorne/Bloomberg

The Australian dollar’s rally in the past month to be the developed world’s best-performing currency, driven by the Reserve Bank’s faith in the economy, will be put to the test by a survey of investment plans due out tomorrow.

Capital expenditure plans will probably fall 16 percent to A$139 billion ($125 billion) in the 12 months ending June 2015, from A$166 billion this fiscal year, a Bloomberg News survey of economists shows. The focus will be on the speed of the contraction in mining investment and the extent to which services industries can pick up the slack, according to Bank of America Merrill Lynch and TD Securities Inc.

The Aussie dollar climbed 3.1 percent against a basket of major peers over the past month, the most among 10 currencies tracked by the Bloomberg Correlation-Weighted indexes, after RBA Governor Glenn Stevens signaled record low interest rates are helping the economy withstand a cooling mining boom. The central bank’s outlook for a “period of stability” in borrowing costs was supported by a survey showing the strongest business confidence in almost three years, even as unemployment rides at a decade high.

“There will be an improvement in the non-mining sectors, but the question is going to be whether that’s enough to offset the big hole left from the drop in mining investment,” said Peter Jolly, the head of research at National Australia Bank Ltd., the nation’s largest bank measured by assets. “The Aussie’s rally compounds the growth issues for the economy and I don’t think the RBA will be comfortable watching it go up.”

Something Stirring

Australia’s policy makers are trying to manage the end of a once-in-a-century mining investment boom which they said Feb. 7 probably peaked a year ago and has since fallen by around 10 percent. The RBA cut its benchmark 225 basis points over two years to spur spending and construction as well as contain a climb in the local dollar, which is still trading 18 percent above its 20-year average.

The “collapse” in mining investment will shave about 3.5 percent off total gross domestic product over two years, NAB forecasts. Still, the bank’s fourth-quarter business survey released Feb. 6 showed “there is something stirring inside businesses,” Jolly said.

Confidence for the next three months climbed to its highest since the period to March 2011 with gains seen in business and trading conditions as well as expectations for future profitability, the survey showed.

Non-mining intentions captured by tomorrow’s survey usually start lower than investment in the previous year and are subsequently revised higher, Bank of America economists led by Sydney-based Saul Eslake wrote in a Feb. 21 note. The bureau of statistics releases seven estimates through the year.

Investment Intentions

The first estimate for manufacturing and the other sectors category, which includes construction, wholesale and retail trade as well as finance, will probably rise 3 percent and 4 percent respectively for the 12 months to June 2015 from the initial estimate for this fiscal year, according to Bank of America economists. Mining intentions will drop 14 percent, they forecast.

The weak outlook for mining activity helped drive the Australian dollar down 12 percent over the past year to 89.94 U.S. cents as of 12:37 p.m. in Sydney, the worst performance among the Group of 10 currencies.

The capex survey was taken over a period when the Aussie fell to a 3 1/2-year low of 86.60 cents on Jan. 24, said Diana Mousina, a Sydney-based economist with Commonwealth Bank of Australia, the nation’s biggest lender.

Aussie Important

“Moves in the currency can be quite sharp, but what’s important is people’s expectations about the currency, because that drives business decisions,” she said. “We think the Aussie will end the year at 84 cents.”

Bearishness in the Aussie was tempered this month as the RBA signaled a period of steady borrowing costs amid signs of rising inflation and improving activity in rates-sensitive parts of the economy.

Swaps pricing shows an 85 percent chance the benchmark will be unchanged or higher by end-July, compared with 25 percent odds of a cut seen on Jan. 31, data compiled by Bloomberg show. Leveraged funds cut net bets on a drop in the currency by 41 percent through last week from the record high reached Jan. 28, according to figures from the Washington-based Commodity Futures Trading Commission.

Mining investment overtook spending by the other selected services category in 2011 for the first time, according to bureau of statistics data going back to 1987. It will probably fall behind again in the next few years, TD Securities says.

“The early signs are there for a turnaround in domestic demand, which is why I have a 10 percent jump in services investment for next year and the Reserve bank raising rates in November,” said Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore. “By the time we get to 2016-17 we’ll see services back as the number one source of investment growth and we’ll probably stop talking about investment growth after that.”

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