Australian dollar crumbles with commodities, yield spreads

Advertisement

DXY was strong last night and is still poised for break-out. EUR was soft:

AUD was weak against developed markets (DMs):

Even weaker against emerging markets (EMs):

Advertisement

Gold was hit:

Oil too and the top looks in:

Base metals fell:

Advertisement

And big miners:

But EMs stocks caught a bid:

Along with EM junk:

Advertisement

Treasuries sold:

Bunds were bought:

And Italian debt:

Advertisement

Stocks firmed:

The news was dominated by oil and the forthcoming OPEC meet. Via the FT:

Iran’s oil minister is resisting a Saudi Arabia-led push to raise crude output, putting the two Middle East rivals on a collision course ahead of a closely watched Opec meeting at the end of the week.

Bijan Zanganeh said he did not believe an agreement to relax production cuts — first agreed nearly two years ago amid a global supply glut — could be reached at the oil cartel’s meeting, insisting the group was not an “American organisation”.

…However, Khalid al-Falih, Saudi Arabia’s energy minister, said late on Wednesday that while they were still in consultations with other members, more countries were backing the idea that it was “time for us to change course”.

“The market demands more [oil] in the second half. The exact amount, the timing, the manner . . . we have a couple of days to discuss.

“I am confident that at the end of the day reason will prevail and we will do the right thing.”

Russia, the largest non-Opec crude producer, and Saudi Arabia have been in talks since May to ease production curbs which came into effect in January 2017, amid pressure from Donald Trump, who has publicly chastised Opec for high oil prices.

Advertisement

It’s likely that the deal is done. How much will they pump who knows? Enough to cap prices but not kill them. Saudi has capacity and so does Russia.

If Brent stabilises around $70 then that’s still bullish for US shale and the USD. At the margin that is more bad new for commodities which are already under pressure from EM capital flight and, soon enough, a slowing China.

It was noteworthy last night that risk in general recovered but the Australian dollar fell anyway. There are two reasons. Commodity prices are the only thing standing in the way of an Australian dollar rout as Aussie bond spreads to Treasuries collapse ever deeper. Last night the 10 year hit -28bps, its widest since 1984:

Advertisement

As commodities weaken, that chart tells you all you need to know about what comes next.


Advertisement

David Llewellyn-Smith is the chief strategist at the MB Fund which is over-weight global equities that benefit from a weaker AUD. 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:

If these themes interest you then contact us 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. 

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.