Australian dollar continues to plunge against the USD: Here’s what the ‘bloodbath’ means for your mortgage

With the Australian dollar now trading at just 61 US cents – its lowest level in five years – consumer confidence is falling and fears are rising about what this means for mortgages.

Except for three days in October 2022, the Australian dollar has not been below 62 US cents since late March and early April 2020 – the first time it has been this low since during the 2008 global financial crisis.

This has led to fears that the falling Australian dollar will lead to higher import prices and that the Reserve Bank of Australia (RBA) will be reluctant to cut interest rates, dashing hopes for mortgage payment relief.

But Westpac Chief economist Luci Ellis told Daily Mail Australia the situation is not that simple. There are much broader facts to consider and the short answer is: no, the exchange rate doesn’t play that big of a role.

‘W“What’s really going on is that the US dollar is strong,” Ms Ellis said on Tuesday.

“And the reason for that is that market participants have changed their minds about what they expect the Fed to do.

‘They now expect that the Fed will not cut rates as much as they previously thought. And in fact, one of the major global banks, Royal Bank of Canada, is now saying that they don’t think the Fed will make any further cuts at all.

“So if interest rates in the US start to move higher, the US dollar-denominated securities will look more attractive… it’s not us, it’s theirs.”

Westpac chief economist Luci Ellis (pictured) told Daily Mail Australia there are much broader factors the RBA could take into account when deciding on a rate cut.

Ms Ellis said it was “possible that consumers were reacting to news of the depreciation of the Australian dollar against the US dollar, resulting in some negative headlines about the outlook for interest rates and the broader economy.”

In addition to a sharp drop of more than 69 dollar cents at the end of September, consumer confidence around jobs also fell by 2.8 percent to 127.2 percent, despite the unemployment rate falling to 3.9 percent in November.

“Consumer confidence around jobs continues to deteriorate, even as recent official unemployment figures have remained low and vacancies have increased,” the chief economist said.

The better news, however, is that Aussies are more positive about the housing market.

While views on mortgage rates fell slightly, from 105.8 percent to 105.7 percent, expectations for the overall housing situation have improved.

“Within the overall picture of interest rates in January, homeowners with a mortgage were more likely to expect a rate cut than renters or outright owners,” Ms Ellis said.

‘Although the share of (mortgage holders) expecting a discount has been greater than that of renters for over a year, the increase this month has also put them ahead of owners.’

Ultimately, the Australian dollar’s current depreciation against the greenback will have “quite a small effect” on an interest rate decision, Ms Ellis said.

Except for three days in October 2022, the Aussie has not been below 62 US cents since late March and early April 2020 (Australian and US banknotes shown)

‘IIt doesn’t have a major impact on what the RBA will decide,” the economist said.

‘More important for what the RBA will decide is whether inflation is falling fast enough – we will know more about that later this month – and whether the labor market is still easing.

‘So the RBA rates the labor market as sort of too tight, above full employment, and so they want to see more easing in the labor market and in the second half of last year that just disappeared, we haven’t seen that. .

‘Unemployment even fell in November. On Thursday we will know what happened in December. JThe number of ob vacancies increased in NovemberSo there are reasons to believe that the labor market did not ease to the same extent, or possibly at all, in the second half of 2024.”

Ms Ellis said: “If that is the case, then the RBA will be concerned that demand in Australia still exceeds supply, and that would therefore impact their outlook for inflation. The exchange rate plays a role in that decision, but it is a small factor.’

The economist added that there is a growing sense that mortgage rate cuts are on the way and that house prices have slowed or even fallen in most population centers.

Australia’s big four banks are divided over when a rate cut will happen. ANZ and the Commonwealth Bank say the first rate cut could come in February.

But NAB and Westpac are more pessimistic and think the first rate cut won’t happen until May.