[BillPaay]

Private sector capital expenditures grew 3.3% q/q in Q2, against the consensus expectation of a 5% decline. The strong bounce in plant and machinery investment raises upside risks for the GDP release next week. In a sign that business confidence has improved significantly, investment intentions for the year to June 2010 were revised up to AUD90.6bn in Q2 from AUD77bn in Q1. That would still be lower than the AUD101bn of investment undertaken in the year to June 2009, so investment is still a soft spot for the economy, but not as weak as the market and, likely, the RBA previously expected. Along with yesterday's upside surprise in the construction data, the capex data raise the chances that the RBA could begin normalising rates by year end. We would not be surprised if closely watched RBA commentators in the Australian press come out with some relatively hawkish articles ahead of next week's RBA Board meeting, which could give the AUD a boost in the coming days. The AUD's reaction to the data over the past couple of trading days has been surprisingly muted, however. This should be for several reasons: first, the bills market was already pricing about 35bp of rate hikes by year-end. Second, equity markets have been tracking sideways despite stronger-than-consensus global economic data. A weak Shanghai Composite index is weighing on the AUD today. Therefore, the capital spending data are likely to help the AUD rise against other risk-correlated currencies, but weak equity markets could see it continue to struggle against the USD and JPY. Third, the tracking of speculative community returns suggests that they remain long the AUD and have been so since late July. CFTC data also continue to show that the most popular position in G10 FX is long AUD short USD.