Moody’s Cuts Rating of Australia’s Biggest Banks, AUD Still Rising

It’s only the beginning of the week and despite the fact that there are only few key economic releases this week, yet, credit rating agencies decided to spice the things up at the beginning of the week.

Earlier this morning Moody’s Investors Services cut the long-term credit rating of Australia’s four biggest banks, saying surging home prices, rising household debt, and sluggish wage growth pose a threat to the lenders.

Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. were all downgraded to Aa3 from Aa2.

Looking at recent data, the House Price Index showed a notable increase at the end of last year, rising by more than 4.7% QoQ. While the estimates were to rise by 3% only. This is the biggest QoQ increase since Q1 of 2015.

At the same time, the Building Permits slowed down recently and posted the biggest MoM decline since October of last year, declining by 2.7% in March, before recovering a little bit to the upside, rising by 0.5% in its latest reading.

However, there are still some good signs of a recovery despite the challenges and the fear toward Australia.

The Employment Change shed a notable rise over the past three months, posting +40K new jobs, despite the fact that the estimates were to show only 10K new jobs.

This is also the first time Australia posts 3 months of consecutive increase above 40K since the financial crises.

As a result, the unemployment rate keeps on sliding, the latest reading showed 5.53%, which is the lowest unemployment rate in Australia since 2012.

Fears Toward Debt?

The credit agencies are always indicating that the downgrade comes on the back of substantial increase in debt levels.

This is not only in Australia, this is globally. In fact, the question remains here, where were these agencies before the financial crises. Nowhere. Therefore, I wouldn’t look at these agencies to decide on my investment plan.

Reserve Bank of Australia Is Not Worries

The Reserve Bank of Australia remained neutral on its policy with no additional measures. However, there is nothing to do for the time being, with inflation is close to 0.0%.

The QoQ inflation stabilized at 0.4% for the past two quarters, after slowing down to 0.1% at the beginning of last year. Therefore, a stabilization period is highly possible over the coming months.

At the same time, despite the fact that the RBA is not taking any new measures, but its active in the currency market according to the charts.

AUDUSD Unique Chart

Looking at AUDUSD technical chart, you can see that the pair is unable to break above 0.76 – 0.77 since February of last year.

Every time the pair tried to break above that resistance, it dropped slides back for few weeks. This is despite the notable decline in the US Dollar since the beginning of this year.

This is a sign for everyone in the market. The RBA is sending a clear message to speculators not to bet on higher AUD anytime soon, as the Bank think that the Australian Dollar is overvalued and would complicate the economic transmission according to its latest statement.

Looking at the chart once again, I would stay with what the RBA said, I won’t bet on higher AUD even if the USD down trend resumes. I would wait for another test of 0.76 – 0.77 first before entering a medium-term trade.