Australian dollar lifts on Draghi, Trump everything boom

See the latest Australian dollar analysis here:

Macro Morning

DXY was firm overnight as CNY popped but EUR sank:

The Australian dollar lifted against DMs:

But could not keep pace with EMs:

Gold tried again to break out:

Oil jumped:

Metals jumped:

Big miners jumped:

EM stocks jumped:

High yield jumped:

The Treasury curve was trashed:

Bunds went nuts:

Aussie bonds went nuts:

Stocks went nuts:

Two causes, very easily identified. First, the ECB’s Mario Draghi went all in:

The prolongation of risks has weighed on exports and in particular on manufacturing. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.”

“The (European) Treaty requires that our actions are both necessary and proportionate to fulfil our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfill our mandate – and we will do so again to answer any challenges to price stability in the future,” Draghi said.

MOAR stimulus coming.

Second, El Trumpo announced a long meeting with El Xio, via Bloomie:

The U.S. and China said their presidents will meet in Japan next week to relaunch trade talks after a month-long stalemate, triggering a rally in financial markets.

President Donald Trump said Tuesday that he had a “very good” phone conversation with Chinese counterpart Xi Jinping. The two leaders will hold an “extended meeting” at the G-20 summit on June 28-29 in Osaka and “our respective teams will begin talks prior to our meeting,” Trump said on Twitter. The U.S. president had repeatedly threatened more tariffs if Xi spurned the opportunity to talk.

Normally, ECB easing would be bad for risk. It means a lower EUR and higher DXY which actually cuts off capital flows to the emerging market and commodity complex.  But markets are probably taking it as a sign that the Fed and PBOC will follow.

And the trade war news swamped such calculus anyway. A cessation of trade hostilities will lift all boats so it was simply time to buy everything.

Ironically, the news struck as the BofAML monthly money managers survey showed the most bearish posture since the GFC, which no doubt added short covering fuel to the fire:

BofAML FMS bottom line: June FMS most bearish survey of investor confidence since the Global Financial Crisis; pessimism driven by concerns over trade war/recession, monetary policy impotence, low strike prices for policy puts; tactical “pain trade” is higher yields & higher stocks, especially if Fed cuts 25bps Wednesday.

BofAML Bull & Bear Indicator: drops to 2.3 from 2.5 with June FMS inputs; contrarian “buy signal” of 2.0 thwarted by resilient credit market inflows & prices.

Cash bulls: FMS cash level soars to 5.6% from 4.6% (Exhibit 1), biggest jump in cash since 2011 US debt ceiling crisis.

Equity bears: 2nd largest drop in equity allocation ever (largest occurred Aug ’11); and FMS relative allocation of equities over bonds drops to lowest since May ’09.

Macro bears: global growth expectations plunge by largest amount since the Nov 1994 FMS (“Tequila crisis”); 2nd biggest ever drop in EPS expectations; record number of investors say economy “late-cycle”; trade war “fear” highest since Jul ’18.

Fed bears: in just 8 months,the percentage of investors expecting higher short rates has flipped from 89% to -10% (lowest since 2008); yet doubts over impact of lower rate growing…monetary policy impotence jumps to #2 “tail risk”.

Policy bears: FMS investors have low strike prices for both the Fed put & the Trump put…S&P 500 level at which investors expect Fed to cut = 2430, at which Trump cuts comprehensive trade deal = 2350.

Crowded trades: long US Treasuries becomes #1 “crowded trade”; US dollar “overvaluation” highest since 2002.

Bearish rotation: FMS shows huge June rotation to bonds, cash, staples, utilities, and huge rotation away from equities, banks, Eurozone, tech.

Trades for the contrarian bull: “long gold, short US$”, “long stocks, short Treasuries”, “long Eurozone, short EM”, “long banks, short utils”, “long energy, short discretionary”.

The only problem is, at least according to fundies, the Fed won’t cut unless stocks are much lower:

And so we return to the bad news is good news paradox. Why would the Fed cut when the trigger is lower markets which have risen on the Fed cut! But how can it not do so now that markets have priced it?

Anyways, the takeways are that the AUD would normally keep falling if the ECB is as aggressive, or more so, than the Fed. But so long as we get better signals on the trade war then the AUD will be better supported. It is anybody’s guess how that will play out.

Latest posts by David Llewellyn-Smith (see all)


  1. DominicMEMBER

    Well, if anyone was ever in doubt over whether risk assets are incapable of staying elevated under ‘normalised’ interest rate conditions, those should be permanently dispelled. It’s official: 8yrs+ of zero rates and trillions in asset purchases have roundly failed to help mend the post-GFC economy. What a disaster. Well done, Bernanke, you clown.

    What next after that abject failure? More of the same — you can put your house on it. Only on a much larger scale.

  2. Can’t believe markets still jump on the announcement of a meeting to talk about the trade war!

    Haven’t we seen this movie before? It always ends the same way.

    • GeordieMEMBER

      Do we get an IPO together for Vault-Tec now or later? Or is it too late for that?

    • Ronin8317MEMBER

      Normally, the leaders will meet to sign a deal, so a meeting in Japan means the deal is already done. However, with Trump the situation is far more dynamic…

  3. The Traveling Wilbur

    After reviewing last night’s commentary and its contribution to the human condition I’ve realised how fine a line the moderation policy (filtering-wise) has drawn for this site and how much effort has gone into applying it.

    After all, this must be about the only blog on the planet where “wh1t3” and “[email protected] Sw1ft” were banned words but “cumbreath” isn’t. MB: still making unique contributions to economics in Australia.

    PS Just kidding about Taylor Swift.

    • BrentonMEMBER

      Maggot was challenged on his views and couldn’t hold-up, so he wilted under the pressure and had a full fledged mental breakdown (by his own admission).

      Not sure why MB tolerates it tbh. Maybe it’s sympathy for someone who can’t handle opposing views and throws tantrums, or maybe its the constant homo-eroticism (look into that Maggot) they enjoy most. Not sure what it is.

  4. Stewie GriffinMEMBER

    Well Facebook launched their coin last night and they decided to throw money at it and build their own blockchain, rather than piggy backing off an existing chain [face goes red].

    From what I could make out from the notes I was reading from their foundation they’ve essentially opted for a centralised crypto model – initially to be based around a shitty Proof of Stake (PoS) system, a sort of Ripple 2.0 with a coin creation/destruction functionality. In fact from what I was reading before I got bored and went to bed, I’m not even sure if their crypto currency could be called a proper block chain as opposed to a database.

    I’ll have a deeper look through their proposal today and might make another comment later, but at the moment it looks as though they’re only going to be doing a measling 1,000 transactions per second (Still better than BTC though). The only interesting bit was that they want to move to a Proof of Work (PoW) model – one which still sounded very similar to BSV in the future, but that it would be on their own chain.

    As far as failed trades go it still ended up all right – up about 10% since I started rabbiting on about it last week.

    Anyhow, nothing much of interest still out there for the time being. BSV remains the premier play out there imho with the development that is taking place on it, and H&H remains correct in that BTC remains a Ponzi.

    If for nothing else take a read of this link, especially around half way down when it outlines the issues that BTC will face with a blockchain that is dependent of Price for its security rather than usage:

    Now back under my rock.

      • Stewie GriffinMEMBER

        No prob HC, I don’t tend to do short term trades, all I end up doing is salami slicing away away my capital. I prefer high conviction trades with good pay off profiles vs potential downside – that it failed and was no downside was a good outcome.

        Regardless I’m not someone to slink away and pretend I wasn’t enamoured with the potential without acknowledging I got it wrong.

    • +1 with HC Stewie. The coins might well be a wild west ponzi, but what market around this world isn’t reliant on Pop Growth, or Pop Growth x Debt? They all seem like Casino’s, just some with better odds, or different stories to hook you over others.

      • Stewie GriffinMEMBER

        “They all seem like Casino’s, just some with better odds, or different stories to hook you over others.”

        IMHO 99% of the crypto coins are.

  5. I’m so tired of this rubbish. Are we just going to keep cutting rates below zero forever while nothing ever improves? Why is it so utterly impossible to try anything new when what we have keeps failing?

    • ToWhom, such as?
      We would all love to know what you think.
      I was thinking war or austerity, but they are not popular options, and they have been used before.

      • Such as ensuring that people make decent money for their work instead of every country lying about skills shortages to keep wages low and the profits in the lands of plutocrats.

        Many countries are already living under austerity, and no country that I’m aware of has ever become prosperous from austerity, so that would not be “anything new”.

    • There was a lot of austerity during world war 2.
      Savings went through the roof, particularly in the U.S., and then the country boomed, taking the world with it.

      • I think the post-WW2 boom probably had other causes aside from austerity, in particular, WW2 ending, maybe the Baby Boom, pent-up demand from after the Great Depression. You may as well call for a new iron curtain if it’s just correlation = causation.