The Australian Dollar's Outlook Dims Again after More Mortgage Lenders Stymie RBA with Rate Hikes

-CBA, ANZ join growing list of lenders raising mortgage rates. 

-Move potentially scuppers the RBA from raising its own rate.

-Increase overshadows solid trade, GDP data, sends AUD lower. 

© kasto, Adobe Stock

The outlook for the Australian Dollar dimmed further after more of the country's lenders raised their mortgage rates, potentially ensuring the Reserve Bank of Australia delays raising interest rates in the future.

The Aussie Dollar was seen struggling following news Commonwealth Bank of Australia and Australia and New Zealand Banking Group have both raised rates they charge to borrowers, taking them up by around 15 basis points each, following a similar move by Westpac just last week.

The Australian Dollar took a dive in response to the Westpac decision and at the time we warned any similar move to raise rates by competitors would likely put pressure on the RBA to keep interest rates 'lower for longer.'

"Both the AUD and the NZD fell today. The trigger was news headlines on mortgage rate increases by two major Aussie banks. The AUD has declined to 0.7170, while the NZD trades near 0.6580," says Philip Brown, a bond market strategist at Commonwealth Bank of Australia. 

Mortgage costs are rising because wholesale funding secured on international markets has become more expensive this year, mostly due to US Federal Reserve interest rate hikes and President Donald Trump's tax reforms, which have made borrowing in US Dollars more expensive the world over. 

With many Australian lenders relying on wholesale markets to fund loans to home buyers, they've been caught out by the increase in wholesale rates, which is now being passed onto customers. The problem for the Australian Dollar is this increase in borrowing costs has the same effect on households as an RBA interest rate rise itself.

Only because the RBA hasn't actually raised its own rate yet, the currency has seen no benefit from the recent change. And fears are that it may not do so for a while to come because the adverse impact on household spending and inflation stemming from an increase in mortgage costs could scupper the central bank from lifting its own interest rate next year. 

"Aussie rallies have been fragile this week and today’s mortgage rate rises by two more of the 'Big Four' local banks knocked AUD/USD back to the 0.71 handle again," says Sean Callow, a currency strategist at Westpac. 

The RBA has held its interest rate at a record low of 1.5% for more than two years now, citing below-target inflation and a litany of headwinds and risks to the consumer price outlook. Consensus is for an initial rate rise to come in the fourth quarter of 2019.

This has had a severe negative impact on the Aussie because rising interest rates elsewhere in the world have created an incentive for investors to sell Australian Dollars and buy other currencies instead. The Aussie has fallen close to 8% against the Dollar and is down around 4% against Sterling this year. 

"The world has become a rather more uncertain place - a backdrop ill-suited to the performance of an economy and currency sensitive to global trade. This and the global phenomenon that is low wage growth has kept the RBA firmly on the policy fence and has seen the spread of Australian bond yields over US equivalents fall to their lowest levels in 18 years," says Neil Mellor, a senior currency strategist at BNY Mellon. "In a nutshell, this is the AUD’s story this year and the scope for further Aussie depreciation becomes all too clear when seen through this vista."

The Aussie had long enjoyed support from interest rates that were typically higher than those elsewhere in the developed world, although it no longer has any interest rate advantage over the US and Canadian Dollars, while the UK-Australia yield gap is also narrowing now the Bank of England has raised interest rates twice in the last year.

"We recently reduced our AUD/USD forecasts for 2018 and 2019. Our new AUD/USD forecasts reflect a stronger USD, slower Chinese economic growth and weaker commodity price, and a further delay to the start of the RBA tightening cycle. We now expect the AUD/USD to more or less trade sideways in the remainder of 2018 before lifting slightly by the end of 2019 to 0.75," says Joseph Capurso, a senior currency strategist at Commonwealth Bank of Australia. 

Capurso and the Commonwealth team say the Pound-to-Aussie rate will fall to 1.7064 over the course of 2019 as UK interest rates will remain below those of the RBA and uncertainty about the economic impact of Brexit will weigh on the British currency over coming years.

Thursday's price action comes despite official data having revealed that the Australian trade surplus held up better than was expected in July. A resilient export trade combined with steady imports to see the surplus decline from $1.94 billion to $1.5 billion in July, when markets had looked for a surplus of just $1.46 billion. 

It also follows on from a solid second quarter GDP report, which showed the Australian economy growing at its fastest pace for nearly six years during the three months to the end of June. Both the trade and GDP data have done little to deter the Australian Dollar from further losses.

The AUD/USD rate was quoted 0.08% lower at 0.7189 during the London morning Thursday while the Pound-to-Aussie rate was up 0.11% at 1.7968. The Aussie was also quoted lower against all other developed world currencies.

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