The Australian Dollar Wilts After Mortgage Rate Hikes Stoke Fears for Housing Market and Economy

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- AUD slides after NAB hikes mortage rates given rising funding costs. 

- Hike overshadows jobs data, threatens housing market, RBA outlook. 

- CBA sees AUD on back foots as HSBC says sell ahead of CPI data.

The Australian Dollar slumped to a three-week low Thursday after an apparently strong labour market report for December was overshadowed by National Australia Bank (NAB) having joined other major lenders in hiking its variable mortgage rates, stoking fears for the housing market and economy. 

NAB said Thursday it's hiking the rates charged to existing mortgage borrowers by between 0.12% and 0.16% following a sustained increase in "international funding costs". That is the result of Federal Reserve (Fed) interest rate policy, which has driven up the cost of U.S. Dollar funding on international markets. 

Owner occupiers of residential property will now see an additional $22 added to their monthly mortgage payment, NAB estimates. Although small, this is equivalent to around half a Reserve Bank of Australia (RBA) interest rate hike. 

NAB now joins ANZ, Westpac and CBA in having hiked rates for mortgage borrowers. The decisions were unconnected to the faltering Australian housing market, although they could yet accelerate the downturn in demand and prices.

"AUD is the night’s biggest underperformer," says Elsa Lignos, head of FX strategy at RBC Capital Markets. "Having initially tried to rally on a better headline employment number, it turned as NAB lifted its home loan variable interest rates by 12-16bps – opening the way to similar moves from the other majors. This puts pressure on the RBA to do something to alleviate funding, adding to cut speculation,"

Above: AUD/USD rate shown at hourly intervals.

House prices in Australia's largest cities have been falling steadily in recent quarters and approvals for new house construction projects have tumbled as firms take note of the deteriorating environment for real estate sales by shelving plans for new developments.

Fears are that the downturn in prices will hurt household confidence and consumer spending, eventually damaging the economy at a time when growth is under threat and the Aussie Dollar under pressure from already-disadvantageous Reserve Bank of Australia (RBA) interest rates. 

With U.S. interest rates now at 2.5%, Canadian rates at 1.75% and with other central banks expected to hike their rates over the coming quarters, the RBA's 1.5% interest rate has created an incentive for investors to dump the Australian Dollar and buy other currencies. 

Only an RBA rate hike will sustainably ease the pressure on the Aussie but below-target inflation, problems in the housing market and an uncertain economic outlook make this highly unlikely. 

"Employment ended 2018 with a sound run," says Justin Smirk, an economist at Westpac. "While it is true that the momentum in the Australian labour market eased through 2018 - annual growth peaked at 3.6%yr in January - it can still be described as sound."

The mortgage announcement followed hard on the heels of December's jobs data. Australia's economy created 21.6k jobs in December which, although down from a blockbuster 39k in November, was comfortably ahead of the consensus for a 17.3k increase. 

That took the unemployment rate back down to 5% when consensus had been for the jobless rate to remain at 5.1% for the final month of the year. 

Above: Australian unemployment rate.

The economy has now created close to 23k new jobs on average in each of the last six months, after a series of upside surprises, but some local analysts are unimpressed by the gains. They suggest the labour market is creaking.

"The strong increase in total employment solely reflected part time employment rather than full time employment. Full time employment has contracted for two consecutive months.  The last time full time employment contracted for two consecutive months was in Q3 2016.  The RBA’s last cut the cash rate in Q3 2016," says Joseph Capurso, a strategist at Commonwealth Bank of Australia. 

Currency markets care about the labour data because of the impact rising employment has on wage growth, demand within an economy and inflation ,which is important for the interest rate outlook.

Changes in rates are only normally made in response to movements in inflation but impact currencies because of the push and pull influence they have on capital flows and their allure for short-term speculators.

"The last time full time employment contracted for two consecutive months was in Q3 2016.  The RBA’s last cut the cash rate in Q3 2016.  We expect markets to continue pricing the risk of RBA rate cuts while global economic activity slows, and this will limit upside in AUD/USD," Capurso adds.

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted -0.67% lower at 0.7097 Thursday and is now up just 0.6% for 2019 after unwinding an earlier 2% gain this week, while the Pound-to-Aussie rate was 0.50% higher at 1.8394 and has risen 1.6% this year. 

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

The RBA has held its cash rate at a record low of 1.5% for more than two years now, citing below-target inflation and wage growth that is insufficient to support a sustainable return of inflation to the upper end of the 2%-to-3% target band. 

RBA rate policy was a key driver behind the Aussie's 2018 losses, although not the only driver, as the so-called trade war between the U.S. and China was also a source of pain to. 

Australia's Dollar had been supported on Wednesday when Chinese policymakers threw a CNY 257.5 bn (US$38 bn) pile of cheap cash at the nation's commercial banks in an effort to support lending to private businesses who are struggling to grow amid the trade war with the U.S. 

This saw markets bid for the Chinese Renmimbi and Australian Dollar, both of which are strongly correlated given the extensive economic relationship between the two countries, although it remains to be seen how long the positive mood will last for. 

However, some are betting against the Aussie. They say domestic factors, particularly final quarter inflation figures due this month, will weigh on the currency. Weak inflation is the reason for the RBA's interest rate stance.

"Global factors have already triggered a considerable rally but the coming weeks may provide greater headwinds from the domestic front," says Tom Nash, a currency strategist at HSBC in Australia. "A soft inflation reading for Q4 would keep it entrenched below target. If the RBA meeting offers any suggestion that the central bank is less confident the next move in rates is more likely to be up, the AUD would likely crack lower...Sell AUD-USD at 0.7180".

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