Australian dollar cracks lower with emerging markets

DXY rebounded last night:

AUD was weak across the board:

The Brazilian real is headed into the crisis zone:

Gold fell:

Oil rose as Palestinians died:

Base metals were mixed:

Big miners flew:

EM stocks held on:

EM junk let go:

Treasuries were bashed:

And bunds:

Stocks were flat:

Some material from Nedbank today outlines the emerging markets dynamics I’ve been banging on about as the USD rises:

The US dollar is still the dominant global currency, and a stronger dollar is an indication of tighter global financial conditions.

If this is the case now again, and we believe it is, then we can expect real rates (term/risk premium) to rise, which would be negative for risk assets. The tighter financial conditions would also be deflationary by nature.

We therefore expect the US10yr to rally (continuation of the 30yr bull trend), reflecting the deflationary forces of a stronger dollar and contraction in the Global $-Lliquidity – this would not bode well for risk-assets (like SA bonds/FX /equities).

The carry index is an important “canary” to monitor. The index has broken out of the bull trend at 260 and has rallied from the 255 neckline on Friday to test 260 from below.

The next few days will be important, as a consolidation below 260 would confirm a major reversal.

A break below the neckline at 255 and below the wave-A high at 252 would project substantial downside (to below the (red) wave-C low of early 2016). The MACD has also confirmed the break out of the bull trend.

….The world, and in particular emerging markets, has been on a dollar debt binge – one that has issued over $3.5.tn (rest of world $10tn) in dollar debt. Hence our concern that a slowdown in dollar liquidity would not bode well for dollar-indebted nations/corporations.

…it is just a matter of time in our opinion before the EM currencies force foreign investors out of the EM markets.

The Australian dollar will crack lower with EMs. It always does:

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David Llewellyn-Smith is the chief strategist at the MB Fund which offers two options to benefit from a falling AUD so he is definitely talking his book. The first option is to use the MB Fund International Stocks Portfolio which is always 100% long as a part of your own asset allocation mix. The second option is to use an MB Fund tactical allocation in which we choose the asset mix for you, including exclusively international stocks, but with bonds and other assets as well to ensure a more conservative mix.

The recent performance of both is below:

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance.