Here's a preview of the RBA monetary policy meeting on Tuesday this week (7 April 2015)
This is very good from UBS, as it also gives a decent summary of the post-mining investment boom capex.(If you want the short version, I've bolded their major points)
While a modest rise in commodity prices would likely be a significant help to CAD and NOK, rising commodity prices are unlikely to come to AUD's rescue
The surge in commodity prices before and after the Global Financial Crisis sparked a boom in Australian mining investment. New ore bodies were explored, new mines opened, rail networks were expanded, port capacity was upgraded, and all this served to significantly boost Australia's export capacity. The fruits of this investment are clearly visible now
(i.e. UBS point to higher exports of iron ore and coal)
Crucially, this supply uplift has been a key contributor to weaker prices for iron ore and coal - Australia's two biggest exports. These steep price declines mean the legacy of Australia's mining investment boom is a trade balance still in deficit territory and a terms of trade now at multi-year lows
Worse still, the boom has matured and is now in sharp retreat. One need only recall the dismal 2015/16 ABS capex intentions survey to be reminded of the considerable headwinds facing the Australian economy - and hence the currency. What really stood out was not the (steep but widely expected) 20% y/y drop in mining; rather, the real kicker was the sharp erosion in non-mining intentions to a 9% fall.
Barring a sudden improvement, total (nominal) business capex next fiscal year threatens to contract for the third consecutive year - the first time on record in at least 50 years.
Based on current plans, our economists reckon that declining investment across all sectors (but primarily from miners) could subtract up to 1.75pp from GDP in the next fiscal year, condemning the economy to another year of sub-trend growth.
Under a number of scenarios ranging from 'optimistic' (using 24-year average realisation ratios), the UBS base case (5-year average realisation ratios), or the 'worst case' (a cycle low realisation ratio), we still envision a deepening drag on growth from capex into 2015/16 of anywhere between -7% to -23% y/y
On Tuesday's meeting:
That's a good reason to expect another RBA rate cut in April. Those not convinced will point to the conspicuous absence of any references to the capex survey in the RBA's March meeting press statement. However, the minutes of that same meeting openly conceded that the capex survey implied "further large falls in mining investment, as current projects were completed and few new projects were likely to proceed" and "non-mining investment would remain subdued for some time yet and for longer than had been previously expected". This alone portends another downgrade to the RBA's GDP forecasts in their May SOMP.
(The 'SOMP' is the Reserve Bank of Australia's Statement on Monetary Policy, which sets out the Bank's assessment of current economic conditions, both domestic and international, along with the outlook for Australian inflation and output growth. The Statement is issued four times a year.)
Back to UBS, and on the Australian dollar:
To help cushion the blow, the RBA has made no secret of its preference for a lower currency, which "would help achieve balanced growth in the economy". Granted, the market has already priced in a larger than 50% probability of a 25bp rate cut this month. However, any AUD relief bounce on a 'no change' verdict next week would simply tee up better levels to fade given the pricing in of further easing beyond that in the market.
This also explains why the Australian dollar has stopped benefitting much from occasional encouraging news flow or positive economic data out of China. Put simply, the mining investment boom is a once-in-a-generation event that has run its course. There is now ample existing capacity to cater to higher demand even if China does resort to another wave of steel-intensive investment.
That leaves Australian dollar bulls pinning their hopes on a revival in investment from the non-mining sectors of the domestic economy. But for that to happen, business confidence must first improve, and a precondition for this is a weaker AUD in our view. It's not too late for graceful rebalancing to occur, but the currency will have to play its part in bringing this about.
