July 2017

For Australian cash investors, a multi-year run of attractive returns from domestic short-maturity investments has ended as the Reserve Bank of Australia (RBA) cut interest rates to a record low, the Australian dollar weakened from three-decade highs and domestic commercial banks’ demand for time deposits declined due to new restrictions imposed by Basel III.

Caught between the challenges of low wage growth and slow economic growth versus elevated house prices and high consumer indebtedness, it is likely the RBA will keep base interest rates unchanged for the foreseeable future. Meanwhile, Federal Reserve (Fed) interest rate hikes have already reduced the RBA/Fed spread to just 0.25% from their peak of 4.50%, and could soon turn this spread negative if they continue.

Lower onshore interest rates, lower ratings for Australian “Big Four” banks and fewer available counterparties pose challenges for Australian treasurers with Australian dollar cash to invest. However, with US Libor yields at their highest in almost a decade, treasurers with US dollar assets, or the ability to hold unhedged or hedged investments, will find that the opportunities to diversify beyond the domestic market and enjoy higher offshore interest rates have become significantly more attractive.

Implications of a US dollar rising rates environment, together with regulatory developments relating to US on-shore money market funds were recently discussed in ‘Money in motion’ from J.P. Morgan Asset Management’s Global Fixed Income blog.

You can also download other Liquidity Insights from our J.P. Morgan Global Liquidity website www.jpmgloballiquidity.com With its user-friendly navigation, you’ll find a seamless connection between liquidity investment solutions and our best thinking, which can help you meet your goals in today’s complex investing environment.

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