Will the Fed rescue the Australian dollar tumble?

DXY was weak Friday night as CNY and EUR rallied:

The Australian dollar bounced against DMs:

But not EMs:

Gold remains quiescent:

Oil rebounded:

And metals:

Plus miners:

But not EM stocks:

Nor junk:

Treasuries were soft:

Bunds bid:

And Aussie bonds:

Stocks added a little:

Westpac has the wrap:

Event Wrap

US April durable goods orders only missed estimates by a small amount (-2.1%m/m, est. -2.0%m/m) and non-defence, ex transport (0.0%m/m, est. -0.1%) showed that other than impacts from Boeing the data seemed solid. However, downward revisions to March gave a decidedly more negative profile to the volatile data series (headline +1.7%m/m from 2.6%m/m, non-defence/ex transport -0.6%m/m from flat). This raises downside risks for both 1Q GDP and 2Q GDP.

UK PM May announced her resignation. She will step down from Conservative Party leader on 7 June (so will remain PM in word at least during Trump’s 3-6 June State Visit) and then act as care-taker PM until a new leader is elected. The process is likely to take several weeks, but is hoped to complete prior to the summer recess begins (20July).

UK April retail sales defied expectations and ex-fuel sales dipped only -0.2%m/m after a revised +1.4%m/m (prior 1.2%m/m) for March. Better weather and strong on-line clothing sales offset weakness in High Street activity but the real story is that consumers remained active despite Brexit uncertainty.

Event Outlook

There are no major events on Monday. The US and UK have holidays.

European Parliament elections will be wrapping up, with results only released after the last poll is closed (after 7 am Sydney time today). Early indications are that voter turnout could be the highest in 20 years. Exit polls are indicating a populist win in France.

US growth is on the slide, as expected. Various pundits now have H1 with a “1” in front of it.  From Merrill Lynch:

We lowered 2Q GDP tracking by 0.2pp to 1.6%, while 1Q remained unchanged at 2.9%.

From Goldman Sachs:

We lowered our Q2 GDP tracking estimate by two tenths to +1.3% and our past-quarter GDP tracking estimate for Q1 by one tenth to +3.0% (qoq ar).

From the NY Fed Nowcasting Report

The New York Fed Staff Nowcast stands at 1.4% for 2019:Q2. News from this week’s data releases decreased the nowcast for 2019:Q2 by 0.4 percentage point. Negative surprises from the Advance Durable Goods Report drove most of the decrease.

From the Altanta Fed: GDPNow

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2019 is 1.3 percent on May 24, up from 1.2 percent on May 16.

Trade war impacts will be marginal but worsen this slowdown even as they lift inflation, via Alphaville:

In a new report, the New York Fed puts a number on just how much it’ll cost. According to estimates crunched by Mary Amiti, Stephen Redding and David Weinstein, the latest round of tariffs will cost the average American household $831 this year, or collectively $106bn annually. As the FT reported here, it’s a combination of an added tax burden borne on importers, who have had to pay more for the same goods since China has not adjusted its prices, and “deadweight losses,” which accumulate when firms switch to cheaper but less efficient producers to reduce their exposure to tariffed goods.

And the US labour market remains in good health:

With no serious damage to the economy unless housing rolls over and it is so far OK, via Calculated Risk:

1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. The one exception for this data series was the mid ’60s when the Vietnam buildup kept the economy out of recession.   Note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 – and was just a continuation of the housing bust.

2) It is also interesting to look at the ’86/’87 and the mid ’90s periods. New Home sales fell in both of these periods, although not quite 20%. As I noted in earlier posts, the mid ’80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid ’90s, nonresidential investment remained strong.

Although new home sales were down towards the end of 2018, the decline wasn’t that large historically.  As I noted last Fall, I wasn’t even on recession watch.   Now new home sales are up year-over-year.  No worries.

Which is not to say that the Fed won’t cut but it will have too “look through” trade war inflation to do so and the market expects just that:

If the Fed cuts then obviously it will pressure the USD downwards and the Australian dollar upwards. But I still can’t see a cut before markets really break down on trade war pressures. So the time to position for any round of AUD strength (however brief) would be as equities break lower as the trade war blows back into US earnings. Oil and junk debt are the leading indicators.

Comments

  1. Meanwhile it looks to me like BTC has just blasted through resistance. Took a fortnight longer than I had guessed, but we got there!

    • I’m starting to think BTC might be a good hedge. But not convinced it’s not gonna implode again.

      The way I look at it.

      Interest rates go up. BTC crashes.
      Interest rates go down. BTC surges.

      People buy BTC to protect against inflation destroying their buying power in my opinion.

      • C.M.BurnsMEMBER

        Who are the major buyers of BTC during this ? I haven’t looked but I’d be surprised if they were in the US or even Europe.

      • Mr Burns – it could be the drug cartels, it could be the North Koreans, it could be the Chinese circumventing capital controls.

        Once upon a time I might have cared. These day’s IDGAF.

      • mikef179MEMBER

        Yep, and I was buying around the bottom too. Yay!

        The critics of BTC in the mainstream are completely missing the point and have been for 10 years now. The only thing that concerns me about BTC, and it does concern me quite a bit, is whether it can scale. And whether some competitor won’t come along that will outcompete it. But otherwise, I don’t see any reason why crypto won’t take over the financial system as a whole.

  2. AOFM doesn’t think interest rates are going to rise here any time soon. New bond line on Wednesday 2031 maturity with a coupon of 1.5% Looks like Mr Evans will be right with his 0.75% cash rate

    https://aofm.gov.au/outright-tender/tender-1129/

    Once upon a time not that long ago we used to get 6% coupons for AGB’s…….this has to mean something.

  3. Not sure if any of you remember the days when the AUD was hovering around 50c but when this did occur the RBA got into the habit of intervening in the market to support the AUD (i.e. buying AUD with their USD reserve). Who is to say that the RBA has not banked a massive USD reserve and wouldn’t intervene again?

    • In the John Hempton episode of the Jolly Swagman podcast, there was an interesting snippet on defence of the dollar. Hempton shared his conversation with Guy Debelle on the subject, with the caveat that it took place before Guy assumed his current role. It went something like this:

      JH: Would you defend the dollar at US60c?
      GD: No
      JH: Would you defend the dollar at US50c?
      GD: No
      JH: Would you defend the dollar at US40c?
      GD: No
      JH: Would you defend the dollar at US25c?
      GD: I wish you wouldn’t ask me these questions.

      Hempton’s conclusion is that the Reserve hits the panic button and intervenes somewhere between USD0.25 and USD0.40.

      It surprised me, I thought they would be in there, guns blazing, well before it got that low. Hempton didn’t date-stamp the conversation, so perhaps Debelle would have a different view today.

      • Debelle is just giving the ‘right’ answer. In reality they will intervene where they need to in order to protect the banks.

  4. Mark Lathams Brain

    China video circulating

    https://www.youtube.com/watch?v=cM0fK1SB7z4

    Also China is now looking at dumping US reserves – it would crash the US dollar hard and force the Fed to raise rates – “nuclear option”.

    They are also now considering targeted sanctions similar to Huawei on “targeted companies” being denied rare earths. This would basically shut down US companies like Apple overnight as it would take months to fire up alternative mine sites and supply chains.

    Meanwhile US farmers are going ballistic – Soy exports were basically 100% to China and have dropped by a totally insane 98%.

    • The funny thing is, China can’t import much soy at the moment – it’s mostly used for pork feed.

      African Swine Fever (basically pig Ebola) is running rampant. They’re slaughtering and destroying tens of thousands. It’s even spread to Vietnam. Maybe even North Korea…

      What WILL be interesting to see is whether China’s forced to buy US pork because of this.
      You do not mess with Char Sui supplies without consequences.

      If you put on your tinfoil hat for a moment… you have to wonder if it could have been deliberate.

      As for Treasuries, the Fed will buy them. Rest assured.
      An article on ZH a couple weeks ago pointed at an occasion (2013-14?) when they dropped a lot of treasuries and… nothing happened.

      • With all the abhorrent things the CIA are documented to have done, it may be kinda nutty, but it’s also 100% plausible.

      • Mark Lathams Brain

        Not sure how well you understand Chinese cuisine and Soy – but I can assure you it is not mostly used for Pigs. Maybe you are thinking of US high intensity factory farms which use it.

        The Soy ban was put in place during the first round of sanctions – so none of this would have affected their shifting supply chain anyway.

        China now grows most of its own soy internally and what extra requirements they have they source from Brazil.

  5. – Disagree. A ratecut from the FED is – in my opinion – a precursor of a USD going higher. Not right now, but in say 4 to 6 months.
    – I actually think a rate cut is very likely in the next say 3 months. Between say december 2018 and say april 2019 the 3 month T-bill rate remained flat. But now in May 2019 that rate seems – I repeat – seems to breaking/drifting lower. That makes me think a ratecut is very likely in the next month(s).