Australia Bank Lending Grows as EU Meeting Pushes Aussie Higher

THE TAKEAWAY: Australian private-sector credit grows as expected, business investment strong > Data comes on the back of Eurogroup meeting optimism > Aussie strengthens

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The Australian Dollar continued to rise after the central bank released data showing credit growth that was broadly in line with expectations. The Aussie continued to benefit from generally healthy risk sentiment; along with positive business-investment figures, market optimism after the first day of the Eurogroup finance ministers’ summit helped propel the South Pacific currency even higher above parity.

According to the Reserve Bank of Australia, private sector credit rose 0.2 percent MoM in October, short of estimates of a 0.4 percent increase. Compared to the same month last year, bank loans rose 3.5 percent. Mortgage loans were up 0.4 percent on the month, while consumer loans for non-housing purchases rose 0.3 percent. A separate gauge showed that business investment rose 12.3 percent in the 3rd quarter, while the pickup in investment in the 2nd quarter was stronger than initially reported.

Aside from the Rismark House Price Index and HIA New Home Sales figures – which reported a 5.5 percent MoM advance in October - the data docket for Australia has been relatively light over the past week. However, Eurozone developments and speculations about an RBA rate cut have continued to drive the currency. The Aussie has been rebounding from Friday’s low of 0.9660 versus the Dollar on relative optimism that Eurozone policymakers would successfully increase the effective capacity of the EFSF bailout fund. At the same time, however, rate-cut expectations have not abated, especially as the Gillard government announced spending cuts and repeatedly stated its commitment to a balanced budget. According to Credit Suisse overnight-index swap data, markets continue to price in over 150 bps of rate cuts over the next 12 months. The interplay between these two factors will continue to shape the Aussie’s course.