June 20, 2017

Australian Markets Weekly: View from the US

Strong focus on the implications of the beginning of normalisation of rates by the Bank of Canada.


  • This week, we report on the views of US investors on the Australian economy and US markets. In general, investors remain relaxed about investments in Australia, even if the government’s AAA rating were to be downgraded.
  • Most conversation was about whether the RBA might be closer to beginning to normalise Australian interest rates, given the signal by the Bank of Canada last week in this direction. We saw this as a low likelihood for this year and suggested that the course of labour market indicators and the unemployment rate were the most important indicators to follow. Interestingly, RBA Board member Ian Harper was interviewed in the press on the weekend sounding more upbeat on the labour market, but signalling that the RBA was unlikely to rush to normalise rates until wages growth began to strengthen.
  • There was quite a deal of discussion about the implications of Australian interest rates slipping below US rates as the Fed continued to tighten. A number have noted that the last time Australian rates were below US rates was in the early 2000s when the $A traded to a record low below US$0.50. NAB sees the interest rate differential development as a mild negative for the $A going forward, but does not see conditions as negative as in the early 2000s, a period when the US$ was extremely strong due to significant capital inflows associated with the tech boom.
  • Investors were focused on Australian housing, but not as significantly as usual – the Canadian housing market was also being monitored as some early warning of how the Australian housing market might play out, given similar fundamentals. NAB’s view is that while the construction market and house prices are likely to slow, the triggers for a substantial correction remain absent at the present time. At this time, we continue to monitor the progress of apartment settlements, as this seems to present the most significant risk of a short term over-supply situation, albeit limited to an extent by continued very strong population growth.
  • On bond markets, investors retained a modestly bearish stance, mainly driven by an expectation of stronger growth, rising official interest rates and a reduction in central bank balance sheets. Inflation was not seen as a concern anywhere for bond investors.
  • Key events this week include the RBA’s Minutes (Tues), RBNZ meeting (Thurs) and a host of Fed speakers.

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