The Wrap: Currency, Rates, Banks & Lithium

Weekly Reports | Mar 02 2018

Weekly Broker Wrap: currencies & interest rates; banks; and lithium.

-Slow progress on employment suggests official rate hikes could be delayed
-AUD likely at a peak and to ease by the end of the year
-Mortgage growth slows, bank valuations remain attractive
-Expansion of low-cost lithium supply likely to end the market surplus


By Eva Brocklehurst

Currencies & Interest Rates

National Australia Bank analysts suspect that weak wages growth and slow progress in reducing unemployment mean it is becoming less likely that their previous call for two increases to official interest rates in 2018 will be realised.

The analysts now envisage the RBA will raise rates only once, late this year. November is considered the most likely start date for a gradual hiking of official rates.

By late 2018 growth should be near 3% and the unemployment rate approaching 5%. Together with increasing tightness in the labour market this may mean private sector wages start to edge up. Still, the analysts concede it is not impossible for the central bank to stay on hold for 2018 and raise rates in 2019.

ANZ FX researchers suggest a top has formed in both the Australian and New Zealand dollars. Domestically the environment is benign but globally it is continuing to deteriorate for both currencies. Rising yields will add volatility to markets and undermine more cyclical deficit currencies such as this pair.

Beyond a rise in yields, broader liquidity is also looking more vulnerable and the positive growth story appears close to being fully discounted. The analysts suggest global growth has reached a point where expectations look extended and caution is warranted.

Westpac analysts suggest the Australian dollar is likely to fall to US$0.74 by the end of the year. Underpinning the view is an expected fall in commodity prices through 2018 and 2019 and a sharp widening in the AUD/USD interest-rate differential.

Westpac expects a considerable widening in the US/Australian interest-rate differential as the US Federal Reserve raises rates while the RBA remains on hold.

Markets are currently pricing in a yield differential between US and Australian overnight rates of -45 basis points by the end of 2018 whereas Westpac expects -63 basis points. Markets are pricing in a differential of -42 basis points versus Westpac's forecast of -112 basis points by the end of 2019.


Macquarie continues to view bank valuations as attractive at current levels. Earnings growth is subdued and the credit environment remains favourable. The broker expects banks to return capital to shareholders via special dividends and buybacks.

The sector continues to trade at a deep discount to the market, which the broker currently calculates at -31% versus the industrials and there is relative value at current levels. The major bank should continue to benefit from improved deposit pricing.

Morgan Stanley calculates that mortgage growth has slowed to around 6%, the sharpest slowdown since July 2013, and expects 4% growth in 2018. The broker notes APRA's 30% cap on new interest-only loans and tighter policy terms are having an impact on the mix of housing lending. Housing growth at the banks is tracking below the broker's first half forecasts, besides ANZ Bank ((ANZ)).

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