The Australian dollar lost a full cent last night:
I’m using such a long term chart for a reason I will come back to.
The driver of the weakness is Fed hawkishness which has US bond yields off and running again:
Notice, however, that the action is all at the short end. The curve is flattening fast, a clarion warning that behind the Trump boom lurks secular stagnation and the Trump bust:
Aussie bonds are not following, barely budging:
Even though, ironically, our slope is more constructive for growth:
Hence the US/Australian spread is collapsing at the short end:
Which brings us back to the long term first chart. The last time the two year spread was 50bps was in April 2001 when the dollar was at…wait for it…51 cents!
That’s how much pressure is being held off the currency right now by the terms of trade rebound:
If bulk commodities deflate during the year as we think that they will, then the Aussie dollar is going to sink like the proverbial stone.
