Australian dollar short squeezes to the moon!

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DXY was smashed last night. CNY and EUR were forced higher:

AUD went bananas on a major short squeeze:

Recalling that market positioning is just too bearish:

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Gold tracked DXY higher:

Oil was hammered:

Base metals better:

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Big miners flew:

EM stocks went nuts:

Junk showed us the truth:

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Treasuries were bid as inflation fears ebbed:

Bunds too:

Stocks soared:

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Westpac has the wrap:

Market Wrap

Global market sentiment: The US dollar fell sharply amid improved risk sentiment and reports of a Brexit deal. US equities continued to recover from October’s rout, the S&P500’s 0.9% gain perhaps helped by indications of a thaw in US-China relations. Oil fell 2% on rising supply.

Interest rates: The US 10yr treasury yield initially extended multi-day gains from 3.16% to 3.17%, but later slipped to 3.14%. The 2yr yield fell from 2.87% to 2.85%. Fed fund futures yields continued to price the chance of another rate hike in December at 75%.

FX: The US dollar index is down 0.9% on the day, wiping out all the gains of the past week. EUR rose from 1.1320 to 1.1424. GBP extended gains from earlier in the day, which were fuelled by reports of a Brexit deal, from 1.2850 to 1.3035. USD/JPY fell from 113.00 to 112.60. AUD benefitted from US dollar weakness and upbeat risk sentiment, extending the day’s rise from 0.7120 to 0.7210 – a one-month high. Outperformer NZD rose from 0.6560 to 0.6659 – a one-month high, perhaps looking ahead to a slight hawkish shift from the RBNZ next week. AUD/NZD fell from 1.0850 to 1.0820.

Economic Wrap

US ISM manufacturing fell more than expected in October. The headline composite index hit a six-month low of 57.7 from 59.8 (consensus: 59) – still healthy levels consistent with a solid manufacturing sector. Underlying activity levels eased, led by softer new orders and employment, but elsewhere the detail depict an economy running into constraints with order backlogs, supplier delivery times and prices paid all increasing. Construction spending was flat in Oct, matching expectations, though the previous month saw a hefty upward revision to 0.8% from 0.1%, which should prompt upward revisions to recently released US Q3 GDP data. Jobless claims held near 40-year lows at 214k.

The Bank of England kept policy unchanged, as universally expected, with little change to its economic or rate projections. Brexit concerns and increased global risks offset positive domestic factors and the Quarterly Inflation Report cited an economy that was “broadly in balance” with a tight labour market. If Brexit uncertainties were not in play and depressing investment intentions, the BoE would be more active than its current gradual guidance on rates.

Event Risk

NZ: ANZ consumer confidence remained at a two-year low in September.

Australia: Sep retail sales are anticipated to increase 0.3% (Westpac +0.2%). That will wrap up a more modest quarter and is expected to see Q3 real retail sales up 0.4% following a robust 1.2% gain in Q2.

US: Oct non-farm payrolls are expected to rise by 195k, bouncing from a weather affected Sep read of 134k. The unemployment rate is anticipated to hold at 3.7%, while a moderate 0.2% rise in average hourly earnings is seen to lift the annual rate to 3.1% due to base effects. Sep factory orders data is also released.

So, what happened to the Aussie dollar? It started yesterday with a positive trade balance surprise (for some). Then we got ‘risk on’ for stocks. The President Trump took up his recent softer tone on trade again:

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Then oil fell, as OPEC is pumping, hurting US growth prospects a little. Then the ISM missed though was still excellent:

The October PMI® registered 57.7 percent, a decrease of 2.1 percentage points from the September reading of 59.8 percent. The New Orders Index registered 57.4 percent, a decrease of 4.4 percentage points from the September reading of 61.8 percent. The Production Index registered 59.9 percent, a 4 -percentage point decrease compared to the September reading of 63.9 percent. The Employment Index registered 56.8 percent, a decrease of 2 percentage points from the September reading of 58.8 percent. The Supplier Deliveries Index registered 63.8 percent, a 2.7-percentage point increase from the September reading of 61.1 percent. The Inventories Index registered 50.7 percent, a decrease of 2.6 percentage points from the September reading of 53.3 percent. The Prices Index registered 71.6 percent, a 4.7-percentage point increase from the September reading of 66.9 percent, indicating higher raw materials prices for the 32nd consecutive month.

And those two were enough to trigger big profit-taking in the DXY.

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Viola! A massive AUD short squeeze. We need more of this yet. It’s been obvious for weeks that AUD has been struggling to push lower through the support of a huge market short so if we chop through that for some time then we might find the path lower a little clearer.

In short, nothing much changed. Just markets at work.

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.