Australia: Energy, housing and political angst weighing on AUD - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, explains that one currency that has failed to capitalize on a retreat in the USD and resurgence in demand for emerging markets is the AUD and has starkly under-performed in recent weeks.

Key Quotes

“The domestic media discourse is heavily focused on three interconnecting issues that appear to be dampening economic confidence and point to economic risks.”

“One is the ever-present debate over the housing market.  More commentators are expressing alarm at the run up in prices that have accelerated over recent months.  Once a source of support for economic confidence, rising house prices in Sydney and Melbourne are generating alarm and demand for policy action.”

“The government is coming under more criticism for not doing more to wean Australians off generous tax concessions for investment in housing (reducing capital gains tax concessions and access to negative gearing).  Regulators suggest that they will support tougher macro-prudential measures to slow lending for housing investment.  Households are heavily leveraged and increasingly concerned that younger generations are saddled with debt or will never be able to afford home ownership.  A number of commentators fear a significant correction in house prices if interest rates start to rise, especially with a growing supply of apartments in the Eastern cities after several years of record apartment approvals.”

“There may be a risk premium being priced into the AUD related to risk of a housing bubble being pricked by policy action (tax changes or macro-prudential measures) or approaching rate rises or other external influence.”

“The other issue that may be weighing on economic confidence is an electric power shortage and high and volatile electricity prices.  Industry is blaming successive governments at the state and federal level for not providing a consistent energy policy overt the last decade, resulting in a lack of investment in new generation capacity.  Contributing factors have been changing government policy on a carbon tax and attempt to replace conventional greenhouse gas producing coal-fired production with renewables.  There have been warnings from industry leaders that this will damage economic growth and broader investment.  Further complicating the debate is the massive investment undertaken in recent years to create an export industry in natural gas.  The debate is further adding pressure on the federal government.”

“A third issue is the approaching May budget, an ongoing struggle to pass legislation and poor polling for the government. The government has struggled for some time with 20 cross-benchers in the Senate, requiring the vote of 9 of them to pass legislation.  Public confidence in the Liberal National Coalition to make significant policy reform has remained low since it was narrowly returned to power in July last year. About the only thing going for PM Turnbull is that the public is equally dissatisfied with the Labor Party Opposition leader Shorten.”