Australian dollar cops a golden flogging

DXY took off again last night. EUR was soft and CNY weak:

AUD was smacked against developed markets (DMs):

And emerging markets (EMs):

Gold broke and is signalling more DXY strength ahead:

Brent was soft:

Base metals mixed:

Big miners too:

EM stocks were firm:

But junk fell:

Treasury yields broke out, curve flattened:

Bunds too:

Stocks roared led by Nasdaq at record highs:

US data was good with industrial production adding to yesterday’s bullish retail sales and manufacturing partials. Fed chair Jerome Powell was bullish on Capital Hill as well, via Westpac:

US Fed Chair Powell made an uneventful appearance in front of the Senate Banking Committee, reiterating that, “for now – the best way forward is to keep gradually rising the federal funds rate.” On the economy he remained upbeat, citing accommodative financial conditions, a firm global picture and tax cuts. Powell noted uncertainties on trade policy, “it is difficult to predict the ultimate outcome of current discussions”, but despite that he felt the risks were “roughly balanced” with the most likely path for the economy being one of continued jobs gains and moderate inflation.

The BofAML fundie survey was out and is very bearish:

• …”trade war” now seen as biggest tail risk to markets since 2012 EU debt crisis.

• …sentiment bearish as growth & profit expectations plunge to Feb’16 lows, equity allocations lowest since Nov’16, forecast of yield curve steepening at 8-year low.

• …July cash levels dip to 4.7% from 4.8%, still high, leaves BofAML Bull & Bear Indicator @ 2.3, i.e. close to “extreme bearish” contrarian buy signal.

• …bearish investors ditched “value” theme via their first “short” of EM stocks since Jan’17, smallest Eurozone “long” since Dec’16, and biggest drop in global bank exposure in 2½ years; note FMS demands for corporate deleveraging hit 9-year high.

• …“long FAANG+BAT” now most crowded trade since “long US dollar” in 2015 as investors aggressively rotated to “growth” theme via tech & pharma, and largest US equity “long” since Feb ’17.

• We tactically advise contrarian bulls to position for overblown trade war concerns via yield curve steepening, EM & EU stock upside, weaker US dollar (note extreme EU debt “tail risk” of Jun’12 followed by 45% rally in EU banks in 3 months).

• We cyclically advise contrarian bears to position for “peak profit, peak policy stimulus” theme via long gold, short US tech (note extreme “long US$” trade of Dec’15 followed by 8% plunge in DXY in 6 months).

So, things get better and the USD falls. Things get worse and and the USD falls. I think it is the opposite. Things get better and the USD keeps rising. Things get worse and the USD keeps rising. Until the Fed buckles which is not until next year.

That said, thanks to China’s reviving property market, I am lifting our year-end AUD target to 72 cents on the notion that bulks will not correct as steeply as previously thought through H2.

David Llewellyn-Smith is chief strategist at the MB Fund which is long US equities that will benefit from a falling Australian dollar. Below is the performance of the MB Fund since inception:

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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.