Preview: October Australian Business Confidence

It looks like we could be in for some volatility in AUD pairs this week, with some key events expected.

To start with, we get a deeper look at the Australian economy and how experts expect it to evolve over the next six months thanks to the release of the NAB Business Confidence Survey.

Unprecedented actions have been taken by the RBA to prop up the Australian economy. In light of this, the hope would be for businesses to be taking advantage of the lowered borrowing costs to expand and support the economy.

However, surveys show that domestic demand remains weak, and that government spending initiatives are what’s supporting the economy.

Without economic expansion, it’s unlikely for the AUD to strengthen in the near term.

What Are We Looking For?

Expectations are for NAB Business confidence to further deteriorate. 

However, there isn’t a firm consensus on a particular figure, yet. But with September’s results at 1, “lower than prior month” expectations imply at best 0, and from there into negative territory (contraction).

That would be the first time that Business Confidence has been this bad since the post-GFC drop in commodity prices circa mid-2013.

NAB splits off the business conditions segment, which contains the evaluation of the current situation. Typically it’s higher than the confidences segment, which contains the outlook for the next six months.

With lower expectations for growth, it would imply a lower AUD in the future. This keeps the AUDUSD in the downward channel it’s been maintaining since near the beginning of the year.

So the RBA Didn’t Do Anything?

The view of the National Australia Bank’s analysts, both the recent tax and rate cuts have may “have had little impact” on the outlook for the economy. Consumer demand remains weak, leaving many businesses with higher inventory and keeping production capacity low.

The measure of employment remains steady, with expectations that businesses will retain their current workforce.

But, on the other hand, expectations of profitability have already dropped into negative. The combination of these indicators shows that businesses are choosing to withstand lower margins in order to keep from cutting headcount.

This is not a long-term sustainable condition. And, if profitability projections continue to fall, job cuts and rising unemployment could be in the future.

But Commodity Prices?

Despite the consternation surrounding the trade war between the US and China, commodity prices remain high, even if we consider the downturn last month.

Australia’s exports remain healthy, setting records even as the economy floundered.

On the other hand, cash flows turned negative last quarter for the first time since 1980. Officials are refusing to address this, even as the drop in interest rates continues to discourage carry traders.

The primary source of carry trading, Japan, has not cut rates. And the RBA is moving faster than the Fed. As the yield spread drops, there is little incentive to invest capital in Australia.

Saying that the RBA had little effect on borrowing might not be all that accurate for the wrong reasons: private lending topped out at a record high a couple of months ago.

It dropped after the RBA’s actions, as did consumer sentiment.

The Markets Going Forward

Unless there is a major surprise to the upside in business sentiment, the current situation doesn’t appear to provide reasons for medium-term strength in the AUD. It will be interesting to review Q3 earnings reports since that’s when businesses adjust their final Capex expectations.

It would be the last chance for support to the AUD from corporate spending.