DXY dumped Friday night. EUR rose and CNY fell:
The Australian dollar jumped against the US but fell against just about everyone else:
Gold took off as DXY weakened:
The major driver of it all is oil which crashed:
The outlook for energy inflation is now completely the reverse:
Metals dribbled lower:
Big miners fell:
EM were boosted by the falling USD:
US junk was hammered but EM climbed, again on the falling USD. I would not expect this to last if oil keeps falling:
The deflation trade destroyed Treasury yields:
And bund yields:
Aussie yields hit new lows too but were less spectacular:
Stocks were thumped:
So, we’re accelerating into the period I have been expecting of trade war blow back into global growth and the commodity canaries are falling off their perches. It’s being complicated by a dramatic repricing of the Federal Reserve outlook. The Fed is going to cut before the year is out as inflation disappears into a bottomless oil well. Markets now see one cut this year and two next:
Which is destroying the US yield curve:
And there is more ahead:
I still don’t see any US recession given the amount of easing already pouring into its housing market. Mortgage rates have been crushed from 5% to below 4% by the crashing long bond. BofAML’s recession dashboard remains calm:
For things to get worse, the equity market will need to deliver a new and substantial shock. Although that is building on trade war blowback, it might yet be short-circuited if the Fed rolls over quickly enough, providing new support to valuations.
So, as the Fed cuts, how far will the USD fall? Capital outflow pressures will deliver some downside. But the trade war is an ongoing inflationary pulse in the US that nobody else has and, crucially, global growth is still more likely to be worse than the US, and suffer more from the trade war. For instance, China is still struggling to stimulate:
Europe is going near to, or into, recession. EMs will buckle with oil and commodities. Other central banks everywhere – including the ECB and PBOC – will follow the Fed with more easing.
There will also be some kind of safe haven bid for the USD as trade war blowback intensifies in equities.
So, I can’t see the USD really crashing. A correction within its uptrend is more likely.
For while that persists, we can ask if the AUD will continue to be bid on the assumption of a growth recovery Downunder post-election. This raises the prospect of a post-GFC rerun in which weak global growth was outmatched by Australia and AUD soared with bulk commodities. Could we repeat that safe haven period?
Bulk commodities are a big Budget tailwind and will filter down as minimal fiscal support. But they are likely to peak soon and diminish steadily. The property market will probably turn into 2020. But we’re also about to print a GDP shocker for Q1, somewhere down near zero, which will drag annual GDP to as low as 1.3%. This starting point is not in anybody’s forecasts, least of all those of the RBA, and its cuts will have to go deeper than is currently expected as unemployment rises through H2, at least if it wishes to revive property.
Then there is the trade war itself which is, in any time frame beyond your nose, a disaster for the Australian economy as it is currently structured.
The return of the AUD safe haven seems pretty unlikely.