AUD responding to household debt fears - AmpGFX

The analysis team at Amplifying Global FX Capital points out that AUD recently, fell sharply after weaker than expected building approvals and retail sales data, despite a strong NAB business survey and ANZ job ads.

Key Quotes

“The focus on building approvals and retail sales suggest the more prevalent fear is a drag that may be arising from the heavy debt load carried by households and a peaking in the housing market.”

“Since becoming RBA Governor in September last year, Lowe has raised awareness of household debt risks.  The RBA has suggested it is willing to live with a longer path back to its 2 to 3% inflation target to avoid further fueling household debt creation. In other words, the RBA fears more harm than good from additional rate cuts from current record lows. This reluctance to cut rates may have initially supported the AUD, but it also contributed to more regulatory pressure to contain credit growth in recent months.”

“In a speech last week, Governor Lowe highlighted research that suggests households may already be at a tipping point; they are reluctant to borrow more, even if rates were cut further, suggesting they are near limits on debt, and rate cuts may do little to boost demand.  On the other hand, households may be much more sensitive to rate rises.  They are already in a mind to consolidate debt, and rate hikes might accelerate this process, dampening consumer spending more significantly than past episodes of rising rates.”

“There has already been some increase in mortgage rates faced by households due to measures by regulators designed to force banks to tighten lending standards; mainly for investor loans, particularly interest only loans. It is possible that at the current high levels of existing household debt, some modest out-of-cycle increases in Australian bank mortgage rates, and evidence that the housing market is around a peak may be contributing to weaker consumer spending.”

“There is a risk that a peaking in the housing market may shift consumer attention more towards paying down debt than consumption.  Already it appears that the wealth effect of higher house prices in the last year has had little positive impact on consumption. Australian’s now fear more than welcome higher house prices; worrying about how their children will afford to buy a house, and sensing high house prices are unsustainable.”

“The RBA has assumed in its forecasts that household consumption will grow in-line with income over its forecast horizon.  There would appear to be a downside risk to this forecast, especially if interest rates start to rise in Australia.  A desire to reduce debt faster in response to higher mortgage rates and a weaker housing market may significantly weaken consumer demand.”

“Since household consumption accounts for 57% of GDP, a weaker trend in consumption may have significant consequences for the overall economy.  The RBA may be much more constrained from raising rates over the period ahead.  The implications are clearly negative for the AUD compared to most other currencies in a rising global yield environment.”