We construct a Financial Stress Index (FSI) for a small open economy, which aims to provide clear and timely signals of nancial market strains. This can be used in developing appropriate responses to address these adverse events. To do so, we use the principal component framework and apply it to Australian monthly data on interest rates, spreads, exchange rates, house price growth and in ation expectations. Decomposing the index into foreign and domestic components, we nd that the foreign factors can explain more than half (57.4%) of our Australian Financial Stress Index (AFSI). To determine the information content of our index, we run a series of Granger causality tests on several economic and nancial observables. We also estimate whether including the AFSI can improve the prediction of the dierent economic and nancial outcomes relative to a specication that uses only its own previous data. We nd that including the AFSI improves the forecasts for future retail sales growth and bank credit growth. Finally, we show that nancial stress can have non-linear eects on bank credit growth. In particular, an increase in nancial stress aects credit growth more adversely if AFSI is high. This result further highlights the importance of an accurate and timely measure of nancial stress in an economy for researchers and policy makers.