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AUD/USD Gains as RBA Financial Stability Report Lowers Rate Cut Bets

AUD/USD Gains as RBA Financial Stability Report Lowers Rate Cut Bets

2016-10-14 03:20:00
Daniel Dubrovsky, Analyst
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Talking Points

  • Aussie Dollar advanced against its peers after RBA released October’s Financial Stability Review
  • The report showed that the central bank sees risks around projected increase in housing supply
  • Swaps show the least dovish, 12-month outlook for the RBA in 17 months

Having trouble trading the Australian Dollar? This may be why.

The Australian Dollar advanced against its major counterparts after the Reserve Bank of Australia (RBA) released its most recent Financial Stability Review. One of the main topics in the report was centered on issues in the country’s housing market. In particular, the risks of an expected increase in housing supply, actions that have been taken amidst those risks and the central bank’s approach to these developments.

In the report, the RBA highlighted that domestic risks have continued to shift towards property development. Adding to that, non-performing mortgage loans have also picked up nationally but remain low. However, they would assess that these risks have lessened a little over the past six months. Looking ahead, the central bank has its eyes on a projected large increase in supply in some inner-city apartment markets. All else being equal, an increase in supply of a particular good should help reduce the price of it.

Where concern could arise for the central bank amidst the increase in dwelling units is home loans going to buyers of increasing credit risk. According to the RBA, banks have recently tightened their serviceability requirements further by restricting lending to borrowers relying on foreign income. In addition, they have taken steps to mitigate the associated risks by tightening lending conditions for new property developments.

At any rate, the RBA said that the developments in the housing market will need to be closely watched to ensure that any behavioral changes do not materially increase systemic risk. After holding rates unchanged at its October 4th meeting, the RBA continued with its passive wait-and-see approach pattern.

With Australian front-end government bond yields rallying following the announcements, the report likely reduced further RBA rate cut expectations. The markets are now pricing in a 28% probability that the Reserve Bank of Australia will cut rates over the next year. This is down from a 76% chance immediately after the central bank’s most recent interest rate decision.

Additional comments from the RBA pertaining to the Financial Stability Review:

  • Housing price growth is also slower than it was a year or so ago, although it has picked up a little in Sydney and Melbourne in recent months.
  • The share of new high loan-to-valuation (LVR) lending and interest-only loans has fallen; high-LVR lending is now at its lowest share in almost a decade.
  • Against these housing risks, the Australian banking system has continued to perform well and banks remain resilient to possible shocks.
  • Efforts are now shifting towards assessing the effects of these reforms on the financial system and the wider economy.
  • Australian banks have responded by boosting capital levels and at the same time reducing their focus on lower-return activities to meet their return onequity expectations over the medium term.
  • In Australia, the Australian Prudential Regulation Authority is seeking to ensure that the banks’ capital ratios remain ‘unquestionably strong’ given their risk profile.

Keep an eye on short-term trends for Aussie Dollar crosses using the Grid Sight Index (GSI) here.

AUD/USD Gains as RBA Financial Stability Report Lowers Rate Cut Bets

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