NAB: “Ominous” Australian dollar headed below 69 cents

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Via NAB today:

The Turkish Lira’s travails dominated the airwaves and financial market price action elsewhere on Friday. TRY ended the New York day 16% lower, having been down 19% at worse, and has just restarted the week above 7.00 to the USD, some 12% lower. President Trump confirmed Friday he was doubling tariffs on imports of Turkish aluminium (to 20%) and steel (to 50%), adding to Turkey’s economic travails. Turkish PM Erdogan’s on Sunday has said that “interest rates are a tool of exploitation that makes the rich richer and the poor poorer – we won’t fall into this trap”. Note the Turkish central bank’s key policy rate is currently 17.75% vs an inflation rate of (15.8%).

Turkey’s Finance Minister (Erdogan’s son-in-law, remember) has just been out saying that Turkey’s institutions will take necessary steps on Monday morning to ease market concerns” and that he will “offer fiscal support to strengthen the independence of monetary policy”. We await developments here with interest, as they say.

Recall it was the FT front page story revealing ECB angst at Eurozone bank exposures to Turkey that sparked Friday’s EUR sell-off (from above 1.15 versus the USD to below 1.14) while AUD again demonstrated its credentials as the favoured EM risk proxy. JPY was predictably the best performing G10 currency Friday and the only one to rise versus an otherwise stronger dollar, with DXY ending 0.9% higher and BBDXY +0.7%. The 96.36% DXY closing level is its highest since 27th June 2017.

US CPI came in at 0.2% in core (ex-food and energy) terms as expected but was 0.24% to two decimal places and meaning the annual rate rose to 2.4% from 2.3%, above expectations. Base effects are partly to blame here, with CPI inflation now seen cruising in the 2.3-2.4% area for the rest of the year.

CAD was only temporarily stronger after good headline labour market statistics but the underlying details weren’t so positive (gains all part time and mostly public sector, while the drop in unemployment was flattered by a fall in the participation rate). Also not positive for CAD, Trump tweeted that while things were going well regarding negotiations with Mexico on a new NAFTA, Canada ‘must wait’. “Their Tariffs and Trade Barriers are far too high. Will tax cars if we can’t make a deal” Trump tweeted Friday.

Sterling drew only temporary support from Q2 GDP printing an ‘as expected’ 0.4%% – though the June monthly read was 0.1% against 0.2% expected. Sterling ended last week as the third worse performing G10 currency after the NZD and SEK. Brexit negotiations resume in Brussels later this week.

Back to AUD, Fridays break below important trend line support in the 0.7325-50 area is ominous. Having been looking to news on whether President Trump will proceed with tariffs on a further $200bn of Chinese imports next month as the likely fundamental catalyst for a break lower, the fact it has come for other reasons and well ahead of this, bodes particularly poorly. As noted in our FX Strategy note published on Friday, it doesn’t require particularly aggressive assumptions about key AUD fundamental divers (risk sentiment, commodity prices in particular) to generate expectations for a revisit to the September 2015 and January 2016 lows below 0.69. If Trump doesn’t pull back on the next phase of tariffs against China, this now looks increasingly likely.

Cop that.


David Llewellyn-Smith is chief strategist at the MB Fund which is long US equities that will benefit from a falling Australian dollar so he is definitely talking his book. 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. 

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.