Wednesday, October 14, 2015

Aussie dollar under pressure | … suffering from interest rates and China

Even though it had seemed to have some technical support yesterday, around the level of the 200 period Exponential Moving Average (EMA) on the hourly chart (see above), the Australian dollar was reeling from a sizeable hit on Tuesday (13th Oct), which saw it lose some 2.15% of its value from its high on the previous day, Monday. This is all in addition to a prolonged previous fall in the Australian unit, which has had it steadily losing value since over a year ago.

Iron Ore, that most important hard commodity for the Australian economy, has also been on a downward track of late.

Suffering from a confluence of events

A number of factors have come into play to give rise to this dramatic fall. Inflation figures out of China showing that prices in the world’s second largest economy, a major trading partner with Australia, had fallen more than was expected, did not help. But the latest twist in the residential housing story in Oz is arguably of more immediate impact. One of the Big Four banks down under, Westpac, which commands a 25% market share in Australian home mortgages, announced that it was increasing its variable mortgage rates by 20 basis points, as well as having a rights issue in order to increase its capital. According to some sources, all this was motivated by the unwelcome attentions of hedge funds, which were alleged to have been building up large short positions in Westpac stock.

Other banks are more likely than not to follow suit, at least on the mortgage front.

A unilateral increase in mortgage rates such as this, as opposed to one that is mandated by government imposed macro-prudential policies, creates a situation where the last obstacle to further cuts in the official core interest rate, a fear of a housing bubble, has disappeared. The Australian central bank is now expected to lower rates further in order to head off deflation and to make Australian exports more competitive.  Hence the severe impact on the value of the Aussie currency.

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