Australian dollar tumbles after poor capex data

The Australian dollar was sharply weaker today on news of a sharp fall in projected business investment in the coming fiscal year.

The Australian dollar was sharply weaker today on news of a sharp fall in projected business investment in the coming fiscal year, an outcome which is expected to weigh on economic-growth forecasts and has stoked the case for even lower interest rates.

At 5.02pm (AEST), the Australian dollar was trading at US76.90c, compared with US77.61c around the same time yesterday. The currency traded as low as US76.73c during today’s in the session.

Government data showed companies expect to cut investment in the fiscal year starting July 1 by 24.6 per cent, compared with their expectations a year earlier for the current fiscal year.

Meanwhile, actual business investment in buildings and equipment fell 4.4 per cent in the first quarter from the final three months of 2014, the Australian Bureau of Statistics said. Economists surveyed by The Wall Street Journal had expected a drop of 2.2 per cent.

The weakness in investment was due mostly to an acceleration in the resources downturn, where a decade-long boom has fizzled out. Huge falls in commodity prices have also sapped confidence.

Investment in the mining sector in the coming fiscal year is estimated to be 34.9 per cent lower than the forecast a year earlier for the current fiscal year, the data showed.

The Reserve Bank of Australia will need to reintroduce an explicit easing bias back into next week’s policy meeting statement, said Paul Brennan, chief economist at Citi.

“We still expect that the bank will need to cut rates by another 25 basis points before the end of the year,” he said.

Mr Brennan said that the weakening investment story would be bad for employment this year.

“If businesses are moderating investment expectations they may also be moderating hiring intentions. This argues against expecting further large monthly employment gains,” Mr Brennan said.

The RBA has slashed interest rates to record lows to counter the impact of crumbling mining investment and ignite confidence in other industries. So far, the tonic, which has seen the cash rate lowered to an unprecedented 2 per cent, is having only a limited impact.

Interest-rate sensitive parts of the economy like housing construction are booming, but not enough to fill the hole being dug by tumbling resource-industry investment.

The central bank remains cautious, not ruling out further cuts if needed. Still, it must move with some caution as pressure builds under house prices, especially in the major capitals of Sydney and Melbourne.

Sally Auld, debt strategist at JPMorgan, said the weak economic outlook meant that the RBA would either cut one more time, or keep interest rates low for an extended period.

The dire investment report “underscores the majority view that the RBA will be unlikely to begin the rate normalisation process anytime soon,” she added.

“The weakness in both actual and expected non-mining investment suggests that the RBA’s desired rebalancing remains some way off,” Ms Auld said.