The rise in USD FRA/OIS spreads has not been replicated to any significant extent in most other currencies, although an exception is for the AUD, points out Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

AUD interbank funding costs have increased significantly, in line with USD funding costs. On the one hand, this might support the AUD, raising the carry return” from the AUD investment.”

“On the other, it might weaken the AUD, representing a higher funding cost for Australian banks, reducing their net interest margins.  At some point it might lead Australian banks to raise mortgage rates, more broadly tightening credit conditions in Australia.”

“It is hard to see a clear link from rising USD and AUD interbank borrowing costs to either the USD or AUD exchange rate.  However, it is interesting to note that Australian banks are one of the few foreign banking sectors to see a fallout from higher US bank borrowing costs.”

“This suggests that Australian banks are more reliant on foreign sources of capital as a marginal source of balance sheet funding than other countries’ banks.  This is despite a significant reduction in Australian banks’ use of short-term money markets since the 2008 Global Financial Crisis (down from around 35% to 20% of bank funding).”

“If we are searching for reasons why the AUD is weaker, it may be that the market is showing concern over the rise in Australian bank funding costs, whereas other currencies, (including the NZD) have not.  However, again, we are not reading too much into this development at this stage.”

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