The Aussie Dollar was trading above 80 US cents 18 months ago but has now broken support at 70 US cents. The immediate target is 68 cents but our long-term target is 60 cents, the lows of 2008.
While this may benefit mining and other export-led sectors, the medium-term impact may be increased cost of offshore funding for the major banks. The chart below, sourced from the RBA, shows major banks rely on offshore funding of close to $650 billion (between 18% and 19% of total funding of $3.4 trillion).
The ASX 200, buoyant after a surprise election result, broke resistance at 6400. Expect retracement to test the new support level, shown at 6350/6400 below on the daily chart. Respect would confirm a fresh advance.
I remain cautious of Australian stocks because of two factors: (1) potential fallout from a US-China trade war; and (2) declining housing prices and construction activity in Australia. With (common equity Tier 1) leverage ratios close to 5%, banks are under-capitalized and could act as “an accelerant rather than a shock-absorber” with any external shocks.