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.”