Image © Desiree Caplas, Adobe Stock

- AUD rises after Fed's Powell dents USD, lifts risk assets.

- Overshadows business investment report for third-quarter.

- Investment falls in Q3 but estimate for 2018 overall rises 4.4%.

The Australian Dollar held onto recent gains Thursday even after official data revealed a deeper-than-expected fall in the value of business investment during the third-quarter, as earlier statements from the U.S. Federal Reserve lifted so-called risk assets the world over.

Corporate capital expenditure fell -0.5% in the third-quarter when markets had been looking for growth of 1.1%, although the disappointment was tempered by an upward revision to the -2.5% fall that was reported for the prior period, with expenditure now reported as just -0.9% lower for that quarter.

Spending on equipment, plant and machinery actually rose at a healthy pace of 2.2% during three months to the end of September, although this growth was offset by a -2.8% fall in spending on buildings and structures, according to the Australian Bureau of Statistics.

"Encouragingly, estimates of planned spending for 2018/19 were much stronger than expected suggesting the outlook for investment remains reasonable," says Adam Myers, a currency strategist at Commonwealth Bank of Australia.

The Australian Bureu of Statistics' estimate of how much companies will invest for the 2018 year was upgraded Thursday, to $114 billion, up 11.3% from the forecast released in the prior quarter and 4.4% on the amount invested in 2017.

Markets care about the capital expenditure data because it rising or falling investment by companies has an impact on overall demand within the economy, which itself important for inflation, interest rates and financial asset prices.

The data is also watched closely because of the message that companies send about their confidence in the economy when they increase investment in new equipment or real estate.

"Our central case forecast is for modest gains in non-mining investment. As well as this capex survey update, this is consistent with other indicators, notable the sizeable pipeline of non-residential building work yet to be done and the uptrend in infrastructure work, particularly investment in renewables power generation," says Andrew Hanlan, an economist at Westpac.

Analysts say the data suggests Australia's economy is motoring along at a healthy pace, although none have flagged it as having meaningful implications for Reserve Bank of Australia (RBA) interest rate policy in the short-term.

The RBA has held its rate at a record low of 1.5% for more than two years and is expected to leave it unchanged into 2020, assuming inflation does not threaten the upper bound of the 2% to 3% target band in the interim.

The AUD/USD rate was quoted 0.43% higher at 0.7332 during early trading Thursday. It has risen 3.8% in the last month alone and is now down by just -6.1% for 2018, after paring back an earlier 10% loss.

The Pound-to-Australian-Dollar rate was -0.36% lower at 1.7496. It has declined -3.5% in the last month and is now up by just 1.5% for 2018.

"AUD/USD should remain firm as the latest Fed assessment works its way through the market. We had previously published the upside resistance in AUD/USD is probably the 200 day moving average of 0.7246. We maintain this view for now and see support for AUD/USD at 0.7191 (30 day moving average) just below our current year-end forecast of 0.7200," says Myers.

Thursday's price action comes immediately after Federal Reserve chairman Jerome Powell put a dent in the U.S. Dollar during a speech on financial stability at The Economic Club of New York.

Powell said the Fed is "just below the broad range of estimates of the level that would be neutral for the economy", referring to the Federal Funds rate and estimates of the "neutral" level. He said back in September that rates were a "long way from neutral", leading markets to believe his view on the strength of the U.S. economy has deteriorated of late.

"Broad-based USD weakness has continued overnight (DXY down a further 0.2%) following the knee-jerk reaction to Fed Chair Powell’s comments late yesterday and further declines in US yields (10yr -5bp at 3.01%). However, we agree with our economists’ assessment that markets are overinterpreting Powell’s reference to rates being “just below the neutral range”," says Adam Cole, chief currency strategist at RBC Capital Markets.

Cole and some other analysts say the market misinterpreted Powell, as he was likely referring to the lower bound of the 2.5% to 3.5% range the Fed says the neutral rate sits within.

The "neutral" rate of interest is the equilibrium level at which Fed policy itself neither encourages nor restricts economic activity. It is not fixed at a particular point, policymakers do not know exactly where it is at any one point in time and so are left with little choice but to estimate where it might be.

Markets care where "neutral" is because once borrowing costs reach that level it might not be very long before the rate moves above it, constraining the economy and bringing an end to the Fed's rate hiking cycle into sight.

"We anticipate the Fed will signal a more gradual path in raising interest rates at the upcoming December 19 FOMC meeting. This may involve a change in language and a lower range in the "dot plots". The FOMC's comments at this meeting should add some further downside pressure to the USD. But a multitude of factors still supporting the USD suggest that the USD won't yet depreciate too far," says Myers.

For the U.S. Dollar, an end to the Fed tightening cycle would probably mean an end to the greenback's reign of supremacy over all other currencies this year.

For the Australian Dollar, and others clobbered by a resurgent greenback, an end to the Fed's tightening cycle would mean respite from the punishing selling pressures seen this year.

The combined effect of the Fed and RBA's interest rate policies has seen the gap between yields on U.S. government bonds and those of their Australian counterparts turn in favour of the greenback this year, driving a rout in the AUD/USD rate.

Advertisement

Bank-beating exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here