Markets don’t care whether Australia is AAA or AA – Capital Economics

FXStreet (Bali) – Paul Dales, Chief Economist at Capital Economics, notes that despite Australia may lose it AAA rating in the years to come, it should not necessarily translate into a sharply lower AUD.

Key Quotes

“It is possible that at some point in the next couple of years, Australia will lose its AAA credit rating. While this would be a huge blow for whichever political party is in power at the time, it wouldn’t be a big deal for the economy or the financial markets. The dollar is unlikely to fall sharply and government bond yields are unlikely to surge.”

“After all, the dollar was broadly stable in the years after Australia lost its AAA rating in 1986 and bond yields fell steadily throughout the AA years. What’s more, this isn’t unusual. After America was stripped of its AAA rating in 2011, the US dollar rose and bond yields fell.”

“The main event next week will be Tuesday’s RBA policy announcement. While interest rates are highly likely to be left on hold at 2.0% and the Bank may not provide any hint that further cuts are in the pipeline, we suspect that the RBA has more work to do yet. Although the GDP data for the first quarter (due on Wednesday) may be fairly strong, we suspect April’s retail sales figures (Thursday) will suggest that growth will slow in the second quarter.”

Paul Dales, Chief Economist at Capital Economics, notes that despite Australia may lose it AAA rating in the years to come, it should not necessarily translate into a sharply lower AUD.

(Market News Provided by FXstreet)