Australia: Fiscal outlook is the least of AUD worries – RBS

James Nelligan, Research Analyst at RBS, suggests that the Australia’s credit outlook downgrade to negative by S&P is the least of Australia's worries in their view.

Key Quotes

“Australia has run fiscal deficits since 2007. We've learnt since the credit crunch that fiscal deficits don't matter as much when you can print your own currency. Its falling relative productivity, terms of trade and the housing sector that matters for AUD. The Australian housing sector has been the biggest growth support over recent years. Housing investment has historically offset weaker mining investment. We saw housing investment soften in Q4:15 and Q1:16. There are growing domestic risks.

China’s tier-one housing is the world’s biggest iron ore demand source. These prices have been supported by money supply growth in China, which we expect to normalise in the second half of the year. China money supply data has been a leading indicator of AUD/USD returns, mostly because of the iron ore terms of trade link. Despite the increasing likelihood of the Liberal-National coalition remaining, the risk of an inconclusive outcome in the Australian general election is not a durable source of AUD weakness we think.”