Australia: Bank funding costs more elevated - AmpGFX

According to Greg Gibbs, Analyst at Amplifying Global FX Capital, a curious development is a significant rise in Australian bank funding costs.

Key Quotes

“Initially, this was thought to be largely related to tighter funding for the USD in global markets that has been blamed on tax reform in the US, causing repatriation of US multinational earnings, and more onshore borrowing by foreign multinational companies operations in the USA.”

“However, there is something more worrying going on with Australian bank funding costs rising further even as USD dollar funding costs have eased from a peak in April. The perception is that this is going to persist in Australia for some time.”

“This raises questions about why Australian banks are facing such a persistent squeeze in funding. It may reveal an underlying vulnerability in the Australian financial sector.”

“It may be symptomatic of tightening liquidity globally, and Australia’s relatively high level of household debt.”

“Smaller banks and lenders have raised rates for mortgage borrowers, and this is expected to spread to the major bank lenders soon.”

“This risks further tightening credit availability in Australia, and somewhat higher borrowing costs that may add to the slowdown in the housing market and weaken consumer spending.”

“The market presumes that the higher funding costs will delay RBA rate hikes for longer. However, it's not clear that this should directly undermine the AUD since the higher funding costs are also improving the carry return from long AUD positions. In effect, they are delivering higher effective interest rates in Australia, for both borrowers in Australia, and buyers of the AUD.”