AUD: Funding stress is more structural – TDS

The sharp pick up in the cost of obtaining AUD funding into June quarter-end was not a complete surprise as it continues the steady rise in Australian funding seen across BBSW, FX forwards and repo since Q3 2017, according to Prashant Newnaha,               Senior Asia-Pacific Rates Strategist at TD Securities.

Key Quotes

“Most market participants appear to have held the view that offshore factors have played a significant role in higher AUD funding costs. Price action into the end of Q2 suggests factors specific to the Australian market are likely at play.”

“We believe these domestic drivers of AUD funding are more likely structural in nature. This implies elevated funding levels are likely to remain a feature of the Australian market landscape.”

“The key driver for the rise in AUD funding costs is linked to Australian Banks’ largest funding source – deposits. Deposits as a proportion of total funding is sitting at decade highs, but total deposit growth is slipping fast.”

“The demand for AUD funding has been most noticeable in FX forwards.”

“With financial year-end for 3 of the 4 major banks on 30th September, we anticipate funding pressures are likely to emerge again.”

“The demand for AUD funding & the magnitude of the moves could be more pronounced with year-end for 3 of the 4 majors.”