After a couple of weeks out of the headlines in terms of economic data, it’s time to check back on Australia.
Next week is likely to be busy Down Under, with a host of key data coming out. We should remember that it was the housing crisis that sparked the latest downturn in Australian expectations. So we naturally want to keep a close eye on what’s going on there.
So far, there hasn’t been any signs of a recovery, despite the back-to-back cuts in the cash rate. At the beginning of the year, as a matter of fact, mortgage rates had started to increase. However, the trend has since reversed, largely thanks to the RBA.
The question is, though, what does this mean for cash flows and the value of the AUD?
What We Are Expecting
Tomorrow we get two bits of interesting information that don’t usually move the markets immediately unless there is a big surprise in the data. However, they can drive trader sentiment and are useful for evaluating longer trends. Especially now that next week, major forex traders should be coming back to the markets after the holiday, and the trading ought to return to normal.
For Building Approvals, the consensus among analysts is that they will increase 2.8% over last month, a modest improvement over the prior drop of -1.8%. This series tends to bounce around a lot, but a result above 0 is helpful to imply that contractors are looking to increase construction in the near future. And, when coupled with other data, it can help support a positive trend.
Money Growth and Circulation
The other data coming out at the same time, and perhaps more directly relevant to the currency, is private sector credit. The expectation is for it to increase by 0.3% over last month, a substantial improvement over 0.1% of the prior two months. Since the beginning of the “housing recession” in Australia, this series has been trickling down, with some unfortunate implications.
On the one hand, lower credit issuance would indicate that the largest users of credit – businesses – are not borrowing to finance growth and investment. Or it could mean that the fiscal health of people isn’t enough to be granted loans. Both of those indicate less spending in the future, which would depress the economy, and slow inflation.
The RBA and the Future of Housing
On the flip side of lower rates is that banks become less profitable, and less willing to loan. This is the situation that the ECB has been battling for a while in Europe. In order to compensate for the loss in net interest income, banks usually raise commissions.
Meanwhile, the construction recession in Australia continues to deepen. There have been three quarters of negative growth so far, and no green shoots to suggest the current quarter will be any better.
It’s All the Big Players
With no sign of resolving the trade issue between the US and China, Chinese investors are still restricted from moving cash overseas to buy homes in Australia. That was one of the primary drivers of the construction boom in the last few years. With even the precipitous drop in prices, the number of sales hasn’t significantly improved.
With an increasing number of homes on the market, builders are less likely to initiate new contracts, which has a knock-on effect on the economy. The RBA cutting the cash rate isn’t going to help encourage Chinese investors return to buying. And this might explain why mortgage rates crept up even as the RBA was looking to cut rates!