Release: Private Capital Expenditure q/q  (3Q)
Forecast: 8.2%,      Previous: 4.9%

Release: Private Sector Credit m/m (Oct)
Forecast: 0.4%    Previous: 0.5%

Date/Time: 11/29/11 at 7:30PM ET (00:30 GMT, 11/30/11)

Capital Expenditure - Mining Sector Continues to Power Aussie's Economy

Measuring private capital expenditure is a great way to see the money that is being poured into the Australian mining sector. Capital expenditure includes building new mines, ordering new machinery, transportation rigs, etc. While the domestic economy has had its trouble this past year, with the unemployment rate rising and weakness in housing and equities, the mining sector continues to enjoy strong growth and strong investment.


That is important to Australia's GDP which is being bolstered by spending by spending on capital equipment. Here is a headline just form today about a new report showing investment in mining soaring. This will lead to more jobs and more income growth via the mining sector which is experiencing a once-in-a-century mining boom.

From Herald Sun: INVESTMENT in Australia's mining industry soared to a record $232 billion in the year to October, according to new research.

The value of the 102 advanced projects - those already committed or under construction - was 74 per cent more than at the same time last year and a third more than in April.


A report released yesterday by the Bureau of Resources and Energy Economics report showed that last financial year, mineral exploration spending totalled $6.2 billion - just shy of the highest amount on record and double the average of the past 30 years.

Based on industry intentions canvassed in the June quarter, Australian Bureau of Statistics data indicate capital expenditure may be around $80 billion (in the current financial year), the Bureau of Resources and Energy Economics said.

That is a good omen for today's report on capital expenditure (capex), as we are expecting to see a strong figure for the 3rd quarter, an 8.2% quarterly increase following a 4.9% gain in the 2nd quarter.

As we can see from the chart to the right, private expenditure rose nearly A$34 billion in the latest quarter, and the total haul for this year will continue to feed economic growth.

The concern for the RBA is how well the rest of the economy holds up and the impact on commodity prices from the strains put on the global economy because of the euro-zone sovereign debt crisis.

Private Sector Credit Should Show Households Taking on Credit

One way for the RBA and for economists to measure demand in the economy outside the mining sector - would be to see the growth in private sector credit - the second report we get from Australia overnight.

Released for:JanFebMarAprMayJunJulAugSepOctNovDec
Private Sector Credit0.3%0.6%0.6%0.0%0.3%-0.1%0.3%0.2%0.5%

Above we see the breakdown of private sector for the past year, and the forecast of a 0.4% increase, following a strong 0.5% in September would be a welcome sign. In September, we saw gains  in housing credit (0.5%), other personal credit (0.4%), and business credit (0.4%).

A positive reading can reinforce the prospects for the economy, showing that there is still ample demand for credit, while a negative reading, one that disappoints forecasts, can be see as a sign that the Australian economy is slowing and would get the attention of the RBA, which has already cut interest rates.

We also have data on new home sales that are tentatively scheduled for today.

Released for:JanFebMarAprMayJunJulAugSepOctNovDec
Private Sector Credit2.4%0.6%4.3%0.2%-0.2%-8.7%-8.0%1.1%-3.5%

There's no forecast figure, but home sales were down 3.5% in September and have been very rocky, especially in June and July when sales were down 8.7% and 8.0% respectively. A positive figure would be good for the Australian economy and therefore the Aussie.

Expectations for RBA See 175 Basis Points of Cuts Within the Next Year

On October 31st, the RBA took an important step in terms of its monetary policy by lowering interest rates for the first time in a year with a quarter-point cut to 4.5%.


This is an important fundamental bias shift for the central bank but also for the prospects of the Australian dollar as it narrows its interest-rate advantage, and if there are further interest-rate cuts down the road that would only further erode that advantage. The question currently is whether that 25 basis point cut in October was enough for the RBA or will Governor Stevens decide to cut rates one more time before the year is out?

By looking at overnight index swaps (OIS) market we can see the expectations of banks and other financial institutions for what the RBA will do over the next year - where they expect rates to be 1 year from now.


The chart above shows the shifting expectations over the previous 6 months. In June and July, markets were expecting the RBA to hold rates steady (a reading of zero means no change in rates). In August and September, with the downgrade of the US credit rating and the flare up of the sovereign debt crisis, banks priced in rate cuts of nearly 150 basis points.

They eased those rate cut expectations to only 100 basis points in October, but with recent deterioration in Europe, this week the index implied a drop of 175 basis points by the RBA. Taking the current RBA benchmark rate of 4.5%, and subtracting 175 basis points, it means banks are expecting rates to fall as low as 2.75% by the end of next year.

Getting a Clearer Sense of Australia's Economy

Today's data can give us a clearer idea of demand within the Australian economy. Capital expenditure spending is a major driving force for GDP and as a quarterly release, this is a top tier fundamental indicator for the country. A better than expected reading would increase GDP expectations, while a miss would weaken them. That makes this an important release that can have an impact on currency markets depending on how different the actual figure is compared to the forecast.

With the private sector credit report we are trying to assess the health of the economy that excludes the mining sector. If households and businesses were confident, they should continue to expand their credit. It doesn't carry as much weight. The new home sales report is an important one considering recent weakness in the housing market.

We do have outside factors impacting general risk sentiment and therefore the Australian Dollar, but during the Asian session, these reports if these surprise expectations strongly on either side, they have a good chance to swing the AUD one way or the other.  In any case, it will give us a better understanding of where the economy stands and what the RBA's next move may be.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, AnalysisEducationVideosCharts, and other trading resources.