Macro Morning: Australian dollar safe haven’t

See the latest Australian dollar analysis here:

Why was the Australian dollar slaughtered?

The uncertainty caused by the Italian elections continued to reverberate around markets overnight with European stocks under pressure and the US dollar and gold benefiting materially from the malaise.

The election result seems to have come as somewhat of a surprise to the established players and clearly also the markets. Stocks in Milan fell 4.9% dragging the rest of Europe with it and putting the whole euro project in jeopardy. There is some hope that the previous antipathy between the established players may be put aside for some sort of “grand coalition” but the comedian turned politician Beppe Grillo, who has driven a wedge through the establishment says he won’t be part of it.

We can all wring our hands and worry about what is going to happen but I thought a quote I saw on Reuters this morning summed up the outlook in the months ahead without too much hyperbole,:

At the very least, a prolonged period of uncertainty faces the Italian economy, affecting investor sentiment. In coming months, fiscal slippage and obstacles to structural and labor market reforms would not at all be well received by global investors,” said Andrew Milligan, head of global strategy at Standard Life Investments

Uncertainty is never good for markets. Well that’s not exactly true is it. It is bad for some markets and good for others.

Turning to news other than the Italian election overnight Fed Chairman Bernanke gave solid support to the easing policy and bond buying strategy that the FOMC is conducting. Last week there were thoughts, which we shared, that perhaps the Fed recognises the risks it is running in the unconventional policy and the impact it is having on markets particularly stocks. However overnight in his testimony Bernanke said:

To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation.

No mucking around there. Jobs are still the focus and the Fed goosing stocks is seen as less troublesome than having less people in the work force. Of course at a human level we could not agree more, we want to see as many people in jobs around the world as can be found but while Bernanke’s comments show the Fed will stay the course there is no denying that its program is a potential cause of instability down the road.

These comments together with a solid year on year rise of 6.8% for the Case Shiller House price index and the big bounce in the Richmond Fed index from -12 to +6 helped stocks in the US shake off the European weakness. At 7.22 with 38 minutes to go the Dow is up 103 points or 0.75%, the Nasdaq is up 0.28% and the S&P has rallied back to 1495 for a rise of 0.48%

Earlier in the night as noted above Europe was under the pump. Adding to Italy’s near 5% loss, Spainish shares fell 3.20%, the CAC dropped 2.67% the DAX fell 2.27% and the FTSE was 1.34%.

On FX and commodity markets the US dollar, gold and the yen were all stronger in what was the classic style of safe haven play in uncertainty. What we haven’t seen – as you will note – is a rally in the Aussie dollar. Sure some will say that RBA Assistant Governor Guy Debelle’s comments in a speech yesterday that the Aussie dollar was:

somewhat on the high side”  and “There’s no limit on our ability to supply Australian dollars,…We have more Australian dollars than anyone else in the world because we print them,”

Thus implying that the RBA could intervene if they wanted is the reason the Aussie is lower and that may be so. But at the risk of banging on a drum the Aussie did not rally in increased uncertainty.

It is not a safe haven, is a safe harbour at best, and as you can see in the chart below traded under 1.02 last night.

aud, audusd, australian dollar, australian dollar price quote, audusd

The Aussie seems biased toward 1.01 at the moment.

To recap FX markets after all the ructions and big moves this time yesterday the majors are largely unchanged day on day. In commodity markets crude is down 0.63% but copper, wheat, corn, silver and gold were all higher. Looking directly at gold we said last week that it could rally as much as $50 from the pessimistic crescendo that we saw and it is now up more than $60 from the low sitting at $1609 up 1.83% on the day. On the charts gold’s rally does not look over so further strength is probably in the offing.


Kiwi trade data, Japanese retail trade and Australian construction work are on the agenda this morning before business confidence data in Europe and durable goods in the US tonight.

Twitter: Greg McKenna

Here is how markets looked this Morning

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  1. The AUD used to get smashed on the slightest of trouble. But now it is more immuned and the sell off is somewhat muted. So in a sense, it is a safe harbour, not a safe haven.

  2. The only surprise to me was that the same thing didn’t happen to Greece. Reading social unrest articles everyday on google gives a good indication of where things are going. And I would not be surprised if this will again happen to the other PIIGS. And rightly so, the poor have nothing, so they don’t have anything to lose, going back to the Lira means people will go to Italy for travel as it will be cheap and manufacturing in the EU will most likely migrate there as it will be cheap. It is a win win for the people of Italy. The only people who stand to lose is rich investors.

  3. “To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation”

    What rapid job creation? The next unemployment print MAY have an 8 in front of it

  4. Looking at the cyclical picture for the All Ords based on data since 1984 (Yahoo) we are now virtually midway (49th percentile) up the range between the median of major bottoms and median of major tops of the All Ord based on the sum of growth percentages for 1, 2 and 3 years. However we are lower on the range between extremes of tops and bottoms and also on the average.

    I calculate this using the sum of the rates of growth for each of 1, 2 and 3 years at each peak and trough.

    The major cautions are that:
    1. not all bull cycles last 3 years and some last longer
    2. Extreme tops don’t necessarily follow extreme bottoms, so the range of extremes is not one that has actually happened.

    The takeaway is that there is a very reasonable expectation that there could be a lot left in this current cycle given
    A. from 26/9/2011 to now is less than 18 months but the median length of a cycle is 2.1 years and the average is 2.5 years
    B. the RBA has not yet raised rates and has an easing bias
    C. Fiscal consolidation by the Commnwealth has slowed and maybe reversed.

    While markets are still overbought internationally the US seems to be ignoring a potential loss of 0.5% of GDP to some sort of sequestration or other spending cuts and Europe has not reacted all that badly to the Italian election outcome (which is not really resolved until a government is formed after this or another poll). So you might do better by waiting, but then again you might not.

    While the mining investment peak and run down seems a negative, maybe it isn’t for a year or two.

    1 yr + 2yr + 3yr
    Median Change Range
    49 percentile

    1 yr + 2yr + 3yr
    Average Change Range
    34 percentile

    1 yr + 2yr + 3yr
    Extreme Change Range
    26 percentile

  5. The BOE talk about going to negative interest rates and the GBP gains against the AUD.

    Go figure