AUD should stay underselling pressure: In AUD too,higher global funding costs do matter due to Australia’s foreign vulnerability, defined by the size of its foreign liability position and the wholesale funding dependency of its banks (Exhibit 12). The latest budget pumped AUD75bn into infrastructure and imposed a 6bp levy on banks’ liabilities. The government partially funding the increased spending through the bank levy has diminished the risk of a near-term sovereign rating downgrade from AAA.
However, the tax on bank liabilities should increase domestic funding costs and make domestic funds less available. It should weaken AUD further if the future bank earnings outlook hurts risk-taking behavior and thus negatively impacts inflation or growth. Our bank analysts estimate the levy will shave 4.5% off earnings.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
