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    Australia: another reason to cut rates

    Yesterday, the Government of Australia presented the state budget for 2015/2016 fiscal year. According to this document, the plans to fight budget deficit can’t be called too ambitious. The government plans to achieve an overall reach budget surplus only in 2019/2020 fiscal year.

    Australian reluctance to force events is quite clear: net government debt is expected to peak in the 2016/2017 financial year and will amount to only 18% of GDP. This is a very low reading, even among states with a top AAA credit rating from the leading rating agencies. So Australia can afford to ignore strict austerity measures in order to reduce government debt without risking its AAA-rating. Especially in the situation when there is a need to stimulate national economy.

    By the way, the Moody’s, after considering proposed budget, has already announced that it “wasn’t disappointed” by the absence of  aggressive fiscal consolidation measures. And this means that nothing threatens the country’s credit rating.

    But for the Australian Government such high level of confidence from credit agencies is not only positive, but also a source of problems. The Australian debt is too attractive for those who are looking for investment objects including bonds with the top ranking. The difference in yield among the main contenders is clearly in Australia’s favor. Let’s take for example current ten-year bond yeild (rounded to tenths of a percent) of the world’s most reliable borrowers:

    • Australia – 3.1%,
    • USA – 2.3%,
    • Great Britain – 2.0%,
    • Canada – 1.9%,
    • Germany – 0.7%,
    • Switzerland – 0.1%.

    Curves13-5-15

    And if we take into account that the US government debt to GDP ratio is around 100% …

    The complexity of this situation is that the flow of foreign investment into Australian bonds leads to the Australian dollar exchange rate growth, which poses threat to the country’s economic growth. How to prevent it? To shift the government debt yield curve down – to soften monetary policy by cutting rates.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

    Yesterday, the Government of Australia presented the state budget for 2015/2016 fiscal year. According to this document, the plans to fight budget deficit can’t be called too ambitious. The government plans to achieve an overall reach budget surplus only in 2019/2020 fiscal year.

    Australian reluctance to force events is quite clear: net government debt is expected to peak in the 2016/2017 financial year and will amount to only 18% of GDP. This is a very low reading, even among states with a top AAA credit rating from the leading rating agencies. So Australia can afford to ignore strict austerity measures in order to reduce government debt without risking its AAA-rating. Especially in the situation when there is a need to stimulate national economy.

    By the way, the Moody’s, after considering proposed budget, has already announced that it “wasn’t disappointed” by the absence of  aggressive fiscal consolidation measures. And this means that nothing threatens the country’s credit rating.

    But for the Australian Government such high level of confidence from credit agencies is not only positive, but also a source of problems. The Australian debt is too attractive for those who are looking for investment objects including bonds with the top ranking. The difference in yield among the main contenders is clearly in Australia’s favor. Let’s take for example current ten-year bond yeild (rounded to tenths of a percent) of the world’s most reliable borrowers:

    • Australia – 3.1%,
    • USA – 2.3%,
    • Great Britain – 2.0%,
    • Canada – 1.9%,
    • Germany – 0.7%,
    • Switzerland – 0.1%.

    Curves13-5-15

    And if we take into account that the US government debt to GDP ratio is around 100% …

    The complexity of this situation is that the flow of foreign investment into Australian bonds leads to the Australian dollar exchange rate growth, which poses threat to the country’s economic growth. How to prevent it? To shift the government debt yield curve down – to soften monetary policy by cutting rates.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!


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