AUD has been hard hit along with Asian EM markets from imposition of US trade tariffs on China and is often viewed as a proxy for Chinese economic and financial risks, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.
“The effective borrowing costs for AUD in FX forward markets are even more elevated than BBSW. This reflects wider cross-currency basis swap, implying that Australian bank funding costs from offshore money markets are hitting new high spreads over domestic cash rates.”
“On the one hand, higher bank funding costs raise the carry from long AUD FX positions and might be regarded as supporting the AUD. On the other hand, it cuts into Australian bank profits and creates pressure for banks to tighten credit conditions in Australia, potentially dampening economic growth, and delaying RBA rate hikes.”
“If anything it appears that rising bank funding costs in Australia are undermining the AUD. This may reflect a view that rising bank funding costs represent a vulnerability in the Australian financial system to tightening global credit conditions. This is making the AUD trade more like an emerging market asset.”
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