AUD/USD swap spread inverts for first time in 16 years

See the latest Australian dollar analysis here:

Australian dollar lifts as US inflation surge falls flat

Via Westpac:

Mixed emotions when I have to extend the scale on the rhs of one of my regular charts, but just had to do it today. AU-US 2yr swap spread negative for first time in 16yrs and I suspect I may to have to extend rhs axis again mid next year?

The axis will run deep! Next up for inversion, straight yields, the spread on which fell to just 2bps last night.

Australian dollar toast!

David Llewellyn-Smith
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  1. No arguments from me. But I don’t understand why the AUD suddenly gained 45 pips against the USD (and all majors) at about 8pm … ?

    Some sort of trading dynamic?

    London analysts woke up drunk and took the RBA minutes as positive?

  2. Phil Lowe spoke at a dinner and said rates will still at current levels longer but next move is up
    Telll him his dreaming

      • Falling AUD can also be bad for some people.
        If it falls imports will be more expensive, which will lead to inflation.
        Inflation and attempts to attract overseas money will lead to higher interest rates.

        The banks owe lots of money, much of it raised in USD.

      • The Traveling Wilbur

        Yes, but it caaaaan cause inflation. And we can’t have that. Inflation is evil and must be destroyed at all costs. Except in existing housing stock of course. Destroying inflation now seems to be the only thing the RBA can be bothered doing… so a low dollar is great as long as you don’t want to buy your first home (as interest rates) and already have a manufacturing job (like in the auto-industry for example).

      • I’ll take the other side of HnH …
        A falling A$ may boost exporters (temporarily) but all Australians lose in the medium term as the cost of anything imported goes up, including the cost of foreign holidays and any other imports you care to think of — pretty obvious stuff.

        However, I concede that received wisdom among the economics establishment these days is that we have to “get poorer to get richer”. What you get is endless rounds of competitive devaluation of currencies – a proverbial race to the bottom.

    • Look up bond yields and inverted yield curve for the principle. Ramifications on growth, currency are also widely discussed for background.

      • Looked it up, so is it correct that since the swap rate is negative, the instrument in Australia is of less value than that of the US? Thus increasing the risk in Australian bonds?

  3. It’s going to be interesting if someone like Soros decides to take our little Aussie battler out behind the woodshed.
    In a way the market needs to get ahead of this or risk the consequences of being on the wrong side of a forced shift, curiously the process of adjustment is providing the Hedgies with the exact ammunition they need to force a major step change in value of the AUD…to be succinct …It’s on like Donkey Kong

  4. “Falling AUD is good not bad. Boosts exporters and import competers. Helps current account deficit.“. Ah yes H&H but have you forgotten the infamous J-curve?
    It’s not an immediate reaction especially given how comprehensively our external non-mining businesses have been torched for the last decade. Lots of pain first and CA going to get worse before it gets better…

  5. “The axis will run deep!”

    Do local deposit rates track the cash rate or cost of funding? If the latter then wouldn’t the cost of funding (and hence deposit rates) track the soon to be higher US interest rate?

    If my understanding correct then RBA has lost control of this baby, they just don’t know it yet.

    • then RBA has lost control of this baby, they just don’t know it yet. Yep that’s about right.
      the RBA can print but printing AUD does not obviate the need to still balance the external account, External account is a zero sum game, what’s not in the Current account must be in the Capital account…now if Capital flow reverses direction (due to inverted yield spreads) and the current Account remains in deficit, then it’s game on with the Aussie.
      Hedgies just love these sorts of opportunities!

  6. Should I be going long USD ETF or Selling the ASX200 short with some BBOZ? Not sure the best way to attack this, at least the BBOZ has leverage, but will a falling AUD drag the ASX with it?

    • A housing market correction certainly will.
      Would be steering clear of US equities at the moment as well, incredibly overvalued, unless you want to take a punt on irrational exuberance, in which case, buy calls, or long ratio call spreads if you think there is still a parabolic rise coming.

    • I keep getting tempted by BBOZ but you never know when China will tap the stimulus pedal and send the miners and hence the ASX through the roof.

      Are you looking at short term trades or investing?

      I can’t help you with the former. But for the latter, in the medium term tu US economy is looking like the strongest in the developed world so stocks or STFs with US exposure are where it’s at.

      (Warning – some people reckon it’s all gonna crash though! They might be right. Who knows).