AUD strength is expected to be capped, as China's real activity data are expected to moderate and Australia's wage price index is likely to remain weak in Q2.
Business surveys are showing that labor costs remained subdued, although interestingly, the more recent surveys show that activity strengthened considerably in July. For example, the AIG services survey reported that sales rose to their highest level since 2007.
Some of this strength reportedly reflected the government's temporary tax break for small business, but easier financial conditions also played a role.
"Combining the services survey with its manufacturing counterpart, the results suggest that a sharp recovery in non-mining activity may finally be under way, although judgment is reserved at this point in case the July spike is not sustained", says Barclays.
