AUD has been the top performer in the G10 over the past week. The combination of better-than-expected domestic data and further declines in US rate provided fuel for the 0.73% rally in AUD against the greenback.
On the data front, despite the drop in Q1 capex from the prior quarter, the capex survey for 2014/2015 was much better-than-expected. Indeed, for Q1 2014 the rise in the machinery and equipment subcategory should boost expectations for growth while the composition of investment showed an encouraging shift away from mining investment towards the tradable sector.
All told, the shift away from mining investment could help rebalance the economy and support a less accommodative stance from the RBA in the near-term.
Equally important for AUD has been the sharp drop in US rates over the past week. The 10-year yield dropped nearly 10bp over past week and hit a new 2014 low of 2.44%. In response, higher-yielding currencies firmed against the greenback and the AUD made a convincing upside break of the 50dma for the first time since January.
Our cyclical model (based on 2-year rate spreads, equity prices, commodity price and volatility) suggest fair value is near 0.95, which means there is scope for AUD’s resilience to persist.
We look to buy on dips near key technical levels.
*CA maintains a long AUD/USD as a trade recommendation, targeting a move to 0.9530.