Australian dollar coiled spring as ASX warms

Dalian is weak today:

But Big Iron firm:

Big Gas has finally caught a bid as the oil short covering rolls on:

Big Gold trends still look a little sad:

Big Bubble is firm just because:

And Big Liar:

Market of the day is the AUD/USD which remains a coiled spring at long term resistance around 78 cents:

With the US CPI tonight it might get triggered.

Westpac today affirms the MB view that it won’t last:

In summary, our expectation that US rates and policy will surprise to the upside while Australian growth and rates will surprise to the downside, coupled with a slowdown in China and weaker commodity prices, still support our outlook for the Australian dollar in 2018.

  • We retain our call for AUD to fall back to USD 0.65 by end 2018.
  • Consequently we are not particularly surprised that AUD has held well in the USD0.75-0.77 range over the last month.
  • Recognition of a significantly weaker profile for the AUD is not expected to gather momentum until the first half of 2018.
  • US interest rates are expected to rise much more quickly than current market expectations.
  • There has also been an “overshoot” in negativity around the US and the USD in the face of disappointment in Trump’s progress toward heath care; tax; infrastructure; and regulatory reform. …  Markets now seem vulnerable to some upside surprises.
  • Markets are expecting a much stronger growth environment in Australia than our view.
  • We continue to expect rates to remain on hold through 2018.
  • Our expectation for the short term yield differential between Australia and the US by end 2018 is minus 0.40% compared to market expectations of plus 0.20%. We consider that, based on historical evidence, Australian rates falling below US rates will have an exponential impact on confidence in the AUD
  • The AUD will remain at higher levels in the next expected episode of negative interest rate differentials due to a much more supportive level for commodity prices. However we do envisage a considerable fall in the key commodity prices through 2018 … underpinned by a marked slowdown in Chinese industrial demand, as the government resumes its rebalancing policies. We also expect a lift in Australian and Brazilian production of iron ore. Because these producers have much lower cost curves than other marginal producers who prosper when demand is booming prices can fall back towards the cost curves of the highly efficient Australian and Brazilian producers.

Other than being aggressively hawkish the US, I agree completely.

Comments

  1. H&H do you worry that while the fundamentals for the AUD are bad, the USD could be even worse with the country’s unfunded pension liabilities and off-balance sheet debts?

    • No. At the end of the day when you have 22 aircraft carriers and the world reserve you can print and bail out anything. We can’t.

      Although, perhaps that’s what you mean!

      • I’ve wondered about Gold. I THINK the Fed just cannot allow to let Gold run in USD terms because that would signal the end of the USD as THE reserve currency. So they do whatever is necessary in the paper gold market to keep a lid on it.
        Happy to be shown to be wrong!

  2. Bank of Canada is showing the way to RBA. Housing market is not cooling in response to MP, its completely out of control. The longer they wait to hike, the harder will be the landing. So far they are two years too late and counting….

    • Nonsense.

      Teh rates must be lower to make housing more affordable. And if lowering teh rates increases prices, lowering teh rates again will make the extra debt needed to buy a house more affordable. And if …..

      Oh wait.

      • vatvapmMEMBER

        As best as I can tell, Canada does not do MP. What they have done is reduce max mortgage amortization from 30 years to 25 years. The big banks are conservative when assessing borrowing capacity. They use a borrowing rate double of current mortgage rates, factor in actual living expenses and have a gross and net debt ratio that they would recommend prospective borrowers stay under. Property investors can deduct mortgage interest and other general expenses but depreciation capped at 4% per year. If investment property is sold for more than carrying value, then this “profit” is recaptured and taxed.

    • DingwallMEMBER

      It’s not cooling because the MP to date (and any other measures that should have been implemented in a timely manner to stop the rot) has been, in a nutshell, a piece of crap. This infatuation with the RBA raising the cash rate just to try to deal with the housing bubble ………. Treat the cause ….

      • Low rates are providing no benefit to the economy, consumer spending is weak, business investment is weak, business and personal lending weak. Why are they weak? Because people have to spend more and more of their incomes chasing the housing bubble, paying rent, or if they already have a mortgage they have to save more into offset accounts so they can afford to upgrade.

        Its time the RBA had a hard look at the evidence that low rates equate to higher growth, because the relationship actually seems to be the inverse.

      • DingwallMEMBER

        Business investment is weak and business lending weak because of individuals chasing the housing bubble with high % of their incomes ? What ?

  3. TailorTrashMEMBER

    …..meanwhile Ms Yellen appears to be botteling out on “normalisation” while she counts down the months to her departure to the lecture circuit .
    ……..she sure doesn’t want the STHTF before that ……….unfortunately normalisation is looking a bit like how do you rebuild a broken and whipped egg……..no doubt from her retirement she will pontificate on how that should be done ………