Australia’s AAA: Haters gonna hate - Westpac

Sean Callow, Research Analyst at Westpac, suggests that when a nation’s sovereign credit rating is AAA, there is obviously only one way to go.

Key Quotes

“Australia was upgraded by S&P from AA+ to AAA in 2003. Several years of strong growth in domestic income and corporate tax payments as Australia’s terms of trade soared helped drive the budget position into surplus. The post-GFC budget deterioration started to stoke talk of a rating downgrade at least 5 years ago. But it is only the past year or so that the “haters” have had to be taken seriously, especially in July 2016 when S&P placed the rating on negative outlook.”  

“The chatter has grown louder as Canberra’s mid-year budget update has drawn nearer (Monday). The general sense in the market is that the downgrade will come within 12 months but post-May 2017 budget might be a more logical time. If it occurs next week, it will be another reason to sell AUD/USD. But the much bigger story for the pair is the latest wave of USD strength after the FOMC meeting.”

“Raising the funds rate was not in serious doubt. And as Rich noted last week, only 2 FOMC members needed to nudge up their projections for the 2017 “appropriate policy path” median to be rounded to 3 hikes, from 2 in Sep. This is the main media narrative from the meeting, yet as the chart shows, it may be more notable that the FOMC has finally stopped cutting its projection for the “longer run” funds rate. Perhaps it is a blip but still noteworthy that the committee believes the longer term outlook has changed since the Sep meeting.”

“The debate will rage over how much higher US yields should rise if the Fed plans “only gradual increases in the federal funds rate”. And the reality of how slowly Congress can deliver any fiscal stimulus might become an issue. But for now, we would not try to pick even an interim high in USD/majors. Dollar strength should keep pressure on G10 and Asian FX into the new year.”