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The Australian Dollar's rebound against the British Pound and other European currencies was supported Thursday by the release of strong domestic capital expenditure and Chinese data.

Australia reported a 2.8% quarter-on-quarter lift in private new capital expenditure in the second quarter, exceeding the 1.2% expected by the market. Equipment spending increased by 1.9% in the period, exceeding consensus expectations for a slide of 0.1%.

"Firms have been increasing equipment spending to boost capacity and in response to generous tax incentives, some of which expired on 30 June 2023. Construction is experiencing a strong burst, in part due to earlier delays, and with the need to expand the capital stock to meet the requirements of a growing population," says Andrew Hanlan, Senior Economist at Westpac.

Based on the CAPEX figures, Westpac reckons the Australian economy is on track to print a 0.4% growth figure for the second quarter.

The Pound to Australian Dollar was lower at 1.9620 in the wake of the data, although Aussie Dollar strength was not enough to completely erase the previous day's 0.65% advance. The Euro to Australian Dollar was lower by 0.20% at 1.6839 and the Aussie was up at 0.6483 against the U.S. Dollar.

"AUD/USD is currently trading near 0.6480. Q2 23 private sector capex was stronger than expected, rising by 2.8%/qtr, with an upward revision to the previous quarter too. The forward-looking intentions survey suggests capex should remain solid in 2023/24. Solid business capex can help to improve productivity growth, which is currently falling," says Kristina Clifton, an economist at Commonwealth Bank.

The domestic figures are proving supportive of the Aussie currency on the margin, although it is potentially the shape of Chinese PMI figures for August that are potentially of greater significance given the importance of the Chinese economy to Australia.

Chinese manufacturing PMI read at 49.7 in August - ensuring it remains in contractionary territory - albeit up from July's 49.3 and ahead of expectations for a reading of 49.4.

A services PMI of 51 was nevertheless in growth territory, even as it slid from 51.5 in July and was below an expected 51.1.

Markets have been on the defensive as Chinese data has disappointed over the course of 2023 and the August PMI figures will offer some sense of relief, even if there are no signs of a spectacular shift in fortunes.

For the Australian Dollar this is supportive given much of its 2023 underperformance against the likes of the Pound and Euro is tied to the disappointing post-Covid Chinese economic rebound.

Above: GBPAUD at daily intervals.

"EUR/AUD has been on an upward trend in recent months. Weakness in China's economy is more of a headwind for Australia because of its relatively high exposure to China through exports and commodity prices," says Clifton.

Expectations for further Chinese stimulus have meanwhile been fulfilled by media reports that China's state‑owned banks are set to cut interest rates on existing mortgages and deposits.

The PBoC is also reportedly drafting policies to ensure private businesses have better access to funding.

"However, the policy efforts have so far not moved the dial on the Chinese economy. We now expect the government to unveil a large economic stimulus package before year‑end to aid the economy. But the impacts of any stimulus should be more visible in the real economy next year rather than this year," says Clifton.

"The risk is China’s economy will grow by less than 5.0% this year if the government does not provide sufficient policy support," she adds.

China is Australia's main trade partner and destination for the majority of its significant natural resource exports, meaning a reboot to Chinese growth rates would be the single most important development that can light a fire under the struggling Australian Dollar.