CNY was up Friday night, CNY and EUR down:
The Australian dollar was smashed against all developed markets (DMs):
And emerging markets (EMs):
Gold fell:
Oil eased:
Base metals are not well:
Neither are big miners:
EM stocks firmed:
EM junk too:
Treasuries were bought:
Bunds too:
Italy is in trouble:
US stocks were firm, Europe weak:
The Australian dollar hit new 18 month lows. It is very unusual to see the currency so comprehensively weak, down against every forex cross that I track. It speaks to this down-leg being about deteriorating local conditions.
We can chart this by comparing the US dollar index versus AUD/USD:
What we find is that the first half of 2018 saw DXY gains as the driving force of AUD weakness. But recently the weakness has been much more about AUD/USD specifically, telling us that the present AUD de-rating is the market giving up on a bullish outlook Downunder.
That bullish outlook is the one promulgated by the Reserve Bank which has consistently promoted an imminent and enduring Futureboom! for Australia plus rate hikes. Even today it’s outlook for 2018/19 is 3.25% and then onwards at boom speed forever:
That chart is now a joke as:
- house price falls steepen with no end in sight as the credit crunch worsens;
- killing consumption and dwelling construction;
- capex investment looking toppy;
- the election campaign underway is certain to stall both even more;
- the drought bearing down;
- China slowing into year end surrounded by trade war pulling down the terms of trade, and
- the infrastructure and NDIS booms flattening out.
As a result, markets are clearly swinging to the view that the RBA will not be raising interest rates in the near future and, if they do, then recession is very likely. The five year bond yield now sits only 16bps above the two year, threatening inversion, and the entire price deck is looking vulnerable to a shunt lower:
There is no sense yet in markets that the RBA will cut but that is what is coming. The base case is some time after the May ’19 election as rising unemployment and softening wages threaten to combine with falling house prices to create a doom loop as Labor takes power and deploys its negative gearing reforms. A few charts from Damien Boey at Credit Suisse make the point nicely. The activity and inflation leading indicators:
And the RBA’s total failure to come to terms with Australian deflation for seven long years:
Given the degree of sovereign risk displayed in Canberra in recent months, and the possible stall in both business and consumer confidence, the deterioration and cuts may even come sooner.
Either way, the RBA’s bullish case for Australia is now a markets laughing stock and that humiliation is a black hole sucking the AUD down.
There is no end in sight.
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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