RBA Winning Room to Weaken Currency as Banks Act to Cool Housing

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The Reserve Bank of Australia is set to win more room to weaken its currency after lenders started doing their bit to cool the housing market.

Australia & New Zealand Banking Group Ltd. said last week it will stop giving discounts on mortgage rates to investors, while National Australia Bank Ltd. also said it would respond to calls from regulators and limit such offers. The RBA’s monetary easing has added fuel to a property boom, with house prices in Sydney rising about 40 percent over the past three years.

While the central bank says the economy needs a weaker exchange rate, the Aussie remains 3.7 percent above the six-year low it touched in April even after the RBA cut its cash rate to a record low 2 percent this month. The currency has been supported by the relative attractiveness of Australian bond yields in a world where the biggest central banks’ key rates are near zero.

“Some signs of an easing in tension in the housing market would I think be very welcome and ultimately would be something that could assist, or give the RBA that flexibility needed” to lower rates, said James McIntyre, Macquarie Group Ltd.’s Sydney-based head of Australian economics, who predicts another cut in November.

Rising Prices

While home prices in Sydney have taken off, growth in other parts of the country has been slower. Average values nationally have increased 25 percent since May 2012, according to CoreLogic Inc.

The RBA has reduced its cash rate by 2.75 percentage points since late 2011, with quarter-point cuts this year in both February and May.

At their May 5 meeting, RBA board members “discussed the potential risk that low levels of interest rates could foster imbalances in the housing market,” according to the minutes. The bank would “continue to work with other regulators to assess and contain the risks.”

“I think it’s probably been every meeting they’ve mentioned strength of housing markets in Sydney and Melbourne and a bit of discomfort with credit growth,” said Michael Turner, a Sydney-based fixed-income strategist at Royal Bank of Canada. “So if that language disappears, almost by definition they’re going to sound a little less hawkish or a little more dovish.”

Watching Carefully

The Australian Prudential Regulation Authority warned lenders this month it was “watching carefully” after urging them in December to limit mortgage growth to investors to 10 percent annually.

Westpac Banking Corp. Chief Financial Officer Peter King has said he views that guideline as a hard limit and the bank is taking steps to temper investor lending growth. ANZ said last Thursday that no discretionary pricing will be available for investor-only mortgage lending and NAB said on Wednesday that growth in its investor home loans should start cooling from the quarter ending September.

“On the regulatory side, we’ve got investors being curbed on a number of fronts and on the housing supply side we’ve got a very big supply that will come through,” said Macquarie’s McIntyre. “We’re looking at a very different housing market in the second half of this year and in the first half of 2016, than we’re looking at right now following the February and May RBA cuts.”

Easing Bias

While the RBA didn’t offer any forward guidance when it cut on May 5, it has since said that it retains the option to ease policy if necessary. The market is pricing in about a 47 percent chance of at least one more quarter point cut within the next six months, according to swaps data compiled by Bloomberg.

In the meantime, the yield premium that Australian bonds offer over their international peers has expanded, helping to keep the currency buoyant.

Australia’s 10-year bond yield has risen for the past five weeks and was at 2.92 percent as of 12 p.m. on Monday in Sydney, little changed from Friday. The differential over similar U.S. bonds was at 71 basis points, up from a low of 34 on March 26. The Aussie dollar was at 78.13 U.S. cents compared with the six-year low of 75.33 cents reached last month.

There’s “not much they can do about the currency other than cut rates,” said RBC’s Turner, who reckons the RBA will reduce again in December. The exchange rate has “probably been a fairly dominant factor in their thinking,” he said.

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