Australian Dollar Could Fall Thanks to CBA, NAB and ANZ Mortgage Rate Hikes
- Written by: Gary Howes
Why do higher mortgage rates in Australia matter for the Aus Dollar's outlook?
CBA, NAB and ANZ have now all followed Westpac’s move and increased variable mortgage rates by 15bps, 17bps, and 18bps respectively for both investors and owner-occupiers.
The repricing of mortgages follows capital raisings by the major banks in response to higher capital requirements imposed by the regulator.
Why does this Matter for the Australian Dollar's outlook?
Higher lending rates have raised speculation of a 25bp cut by the RBA in November.
Rising mortgage rates mean Australians will have to tighten their belts as the cost of living rises; this could well feed back into the economy by suppressing consumer confidence, and therefore growth, in the non-mining sector which the RBA is desperate to see grow.
The RBA needs the non-mining sector to pick up the slack left by the mining sector which is now in retreat as the Chinese growth story slows.
The obvious move by the RBA is to cut interest rates in a move that would help stimulate lending elsewhere in the economy, thereby negating some of the impact of higher mortgage rates.
The problem for those hoping for a stronger Australian dollar is that lower interest rates lead to a weaker currency.
Latest Pound / Australian Dollar Exchange Rates
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Global currency flows into Australia will likely fall as the yield advantage of Australian financial assets declines.
"Higher lending rates have inevitably raised speculation of a 25bp cut by the RBA in November. While risks of a November rate cut have undoubtedly risen, we remain comfortable with our view that a cut at the February meeting is more likely," says Katie Hill at ANZ in Sydney.
It is not just the out-of-cylce mortgage rises that provide downside impetus to the Australian dollar.
Economic fundamentals continue to deteriorate for the AUD with the data pulse from China continuing to highlight weakness in the industrial sector.
Last week industrial production growth slipped to 5.7% y/y, the same level that it hit in the 2008, while steel prices are also wallowing at their lows, a fact that is not reflected in the current level of the AUD note ANZ.
"On the domestic front the CPI will be the key driver for the AUD. Here, we expect a consensus number of 0.7% q/q. That said, the reaction function is weighted to the downside as the recent mortgage rate hikes have left the market seeking an excuse to more aggressively price in rate cuts," says ANZ currency specialist Daniel Been.
ANZ remain structurally bearish on the AUD, targeting USD0.67 by December 2015.
Downside is also forecast in the GBP to AUD exchange rate having noted strong fundamentals in the UK will likely drive GBP outperformance.
