AUD: Little to recommend - AmpGFX

The research team at Amplifying Global FX Capital explains that the AUD has been losing yield advantage over the last five years, and this accelerated in the last year as the RBA cut rates in 2016 and the Fed resumed hikes in December last year. 

Key Quotes

“The two-year swap rate is a thin 24bp in favour of the AUD.”

“The FX market has not paid consistent attention to yield spreads in recent years, with flows to equities and higher yield corporate bonds frequently dominating investor attention. The low volatility environment tends to favour higher yielding currencies.  Nevertheless, the rate spread in favour of the AUD is so low now it may not be attracting much demand.”

“The Australian equity market also has little to recommend it compared to global peers, highly concentrated in the large banks that are under regulatory pressure to slow lending to households, and exhibiting higher risk related to the housing market.”

“Australian bank share fell on Tuesday anticipating an announcement by the government to place a special levy on these highly profitable institutions in the May budget.  From 1 July 2017, banks with $A100bn in liabilities will pay an annualized rate of 0.06% on their liabilities. It is expected to raise $A6.2bn over four years.”

“The USD has generally regained some strength in recent trading.  Yields in the US are creeping up as the market readies for a probably second rate hike by the Fed on 14 June.”

“We may find that the AUD slips to new lows to reflect its diminished yield advantage, increased risk related to its housing market, related sluggishness in consumer spending, the recent retreat in iron ore prices, higher Chinese financial risk, firming US yields and relatively unattractive Australian bank equities.”