Daily Commentary BY THE CURVE TEAM –

Funding Gap Widening for Banks in the Deposits Market

16th July 2018

nab released a report highlighting the deposits market faces a potential $70 billion funding gap due to higher global interest rates, greater usage of savings via superannuation, an increasing appetite by SMSF investors for global assets and higher loan servicing costs reducing borrowers capacity to make accelerated prepayments.

Wholesale funding costs have moderated since their peak around the end of June but there may only be a slight pause as the FOMC meeting in late September is expected to deliver another rate rise from the range 1.75% to 2.00% to 2.00% to 2.25%. The end of month and end of quarter periods are traditionally the most volatile for market pricing. Domestic ADIs would be viewing the end of September as another period of intense competition for funds unless certain demand pressures abate.

Forward FX is a key pressure point at the current time. The 3 month implied interest rate is 37 bpts higher than 3 month BBSW and highlights a struggle to deliver existing commitments of pre-borrowed USD. This is another market where some have lent long like 2 months and are borrowing short on say overnight and getting seriously squeezed. Just like Floating Rate Notes and Hybrids have an improving yield profile, US dollars are a scarce commodity which is becoming more evident in the new dimension of reducing global USD liquidity and higher interest rate servicing charges.

The market awaits the release of the RBA’s July Board Meeting minutes tomorrow at 11.30am. I expect this to reveal very little on any heightened level of intent in either direction. I expect the setting of 1.50% to be valid for quite some time into the future.

Peter Sheahan

Director - Institutional Sales