July 16, 2021

Melbourne Lockdown 5.0 and the dislocation between the AUD and commodity prices for Australian exports

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With LD5 (Lock Down 5) hitting Melbourne the diary has been cleared of a site visit to a significant Tasmanian agricultural borrower and we have found ourselves with many hours to contemplate the glaring dislocation between a low Australian dollar (AUD) and record commodity prices for Australian exports (and a decade low Australian unemployment rate announced this week).

What does this once in a lifetime dichotomy, induced by artificially low interest rates, mean for the Australian macro-outlook and our borrower universe?

      1. Horizontal developers (land and industrial estates); and
      2. Vertical developers (apartments, hotels and offices).

Ultimately the disconnect between strong commodity prices and employment versus a weak AUD and low interest rates is unsustainable: it just does not make economic sense. At some point these factors will begin to move in tandem again, however market and economic irrationality can persist for a long time.

For the time being it is helping to buoy the outlook for Australia and most of the collateral underlying our loans. We continue to experience no sign of impairments when reviewing valuations but remain vigilant in our stress tests when contemplating the current economic construct and thinking it cannot last forever.

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