Australian dollar smashed as BoJo lands on the euro

See the latest Australian dollar analysis here:

Macro Afternoon

DXY roared last night as EUR and GBP tanked. CNY was stable:

The Australian dollar was belted with the EUR:

Gold eased:

Oil lifted:

Metals were mixed:

EM stocks stuck:

Junk boomed:

Treasuries sold:

Bunds boomed:

Aussie bonds were bid:

Stocks were firm:

There wasn’t much data but DXY caught a lift into the evening as El Trumpo lifted fiscal spending:

Then the key driver of the night’s forex action kicked in, via the BBC:

Boris Johnson has been elected new Conservative leader in a ballot of party members and will become the next UK prime minister.

He beat Jeremy Hunt comfortably, winning 92,153 votes to his rival’s 46,656.

The former London mayor takes over from Theresa May on Wednesday.

In his victory speech, Mr Johnson promised he would “deliver Brexit, unite the country and defeat Jeremy Corbyn”.

The IMF is not so sure, warning on a Brexit shock:

Global growth remains subdued. Since the April World Economic Outlook (WEO) report, the United States further increased tariffs on certain Chinese imports and China retaliated by raising tariffs on a subset of US imports. Additional escalation was averted following the June G20 summit. Global technology supply chains were threatened by the prospect of US sanctions, Brexit-related uncertainty continued, and rising geopolitical tensions roiled energy prices.

…Policy actions and missteps have played an important role in shaping these outcomes, not least through their impact on market sentiment and business confidence. While the six-month extension to Brexit announced in early April provided some initial reprieve, escalating trade tensions in May, fears of disruptions to technology supply chains, and geopolitical tensions (for example, US sanctions on Iran) undermined market confidence (Box 1).

…The projected pickup in global growth in 2020 relies importantly on several factors: (1) financial market sentiment staying generally supportive; (2) continued fading of temporary drags, notably in the euro area; (3) stabilization in some stressed emerging market economies, such as Argentina and Turkey; and (4) avoiding even sharper collapses in others, such as Iran and Venezuela. About 70 percent of the increase in the global growth forecast for 2020 relative to 2019 is accounted for by projected stabilization or recovery in stressed economies. In turn, these factors rely on a conducive global policy backdrop that ensures the dovish tilt of central banks and the buildup of policy stimulus in China are not blunted by escalating trade tensions or a disorderly Brexit.

…The United Kingdom is set to expand at 1.3 percent in 2019 and 1.4 percent in 2020 (0.1 percentage point higher in 2019 than forecast in the April WEO). The upward revision reflects a stronger-than-anticipated first quarter outturn boosted by pre-Brexit inventory accumulation and stockpiling. This is likely to be partially offset by payback over the remainder of the year. Monthly GDP for April recorded a sharp contraction, in part driven by major car manufacturers bringing forward regular annual shutdowns as part of Brexit contingency plans. The forecast assumes an orderly Brexit followed by a gradual transition to the new regime. However, as of mid-July, the ultimate form of Brexit remained highly uncertain.

…Disruptions to trade and tech supply chains: Business confidence and financial market sentiment have been repeatedly buffeted since early 2018 by a still-unfolding sequence of US tariff actions, retaliation by trading partners, and prolonged uncertainty surrounding the United Kingdom’s withdrawal from the European Union. In May, the breadth of the tensions widened to include the prospect of US actions relating to Chinese technology companies and the US threat to levy tariffs on Mexico in the absence of measures to curb cross-border migration. While the tensions abated in June, durable agreements to resolve differences remain subject to possibly protracted and difficult negotiations. The principal risk factor to the global economy is that adverse developments—including further US-China tariffs, US auto tariffs, or a no-deal Brexit—sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth below the baseline.

So, we get the picture. The IMF doesn’t like a hard Brexit. But it is more likely now than ever. Polls don’t give BoJo a whole lot of choice. He can’t call an election and he is being eaten alive by Nigel Farage:

Remember, wherever the EUR goes so goes the AUD:

Not even trade war goodness could help the AUD, via Bloomie:

U.S. Trade Representative Robert Lighthizer and senior U.S. officials are set to travel to China next Monday for the first high-level, face-to-face trade negotiations between the world’s two biggest economies since talks broke down in May, Bloomberg News reports.

Lighthizer and a small team will be in Shanghai through Wednesday, according to people familiar with the plans who asked not to be identified. The meeting is expected to involve a broad discussion of the issues outstanding, a senior administration official said.

Then again, why would anyone believe it is more than PR?

David Llewellyn-Smith
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  1. Cant think of a reason why el trumpo would even care for a resolution on the trade talks right now. What benefit will it be at this point??

  2. Boris as British PM – chalk another one up for Peachy’s Prescient Predictions tally.

    • DominicMEMBER

      You can’t claim that one. I’m trying to think of a person who said he WASN’T going to be PM.

      (As an aside he is the 3rd British PM I’ve been in the same room with — true fact. BoJo spoke at a dinner I attended many years ago. He went up to the podium, glass of red wine in hand, possibly slightly p!ssed and had the place in stitches for about 25 mins. Always had a soft spot for the blonde buffoon since)

  3. Think it’s just capital moving from Europe and UK to US into Dow.
    Everyone keeps focus on US China but the real disaster are the fights btw France UK, Germany big fights with UK and Switzerland banning trading.
    Europe UK, is a disaster zone
    Think we will see EURO and Pound eventually break parity on both. Maybe end of 20 into 2021, Euro split, lagarde takes over ECB at end of October, IMF has been critical of QE in Europe. It looks like an absolute disaster zone. I read somewhere that ECB holds more than half of Euro Gov bonds, how long can they keep rates at zero negative
    I wrote yesterday that Aussie mortgage rates could double over next 18 months, think the lead will be Euro interest rates rising
    The governments in Europe will fold if rates normalise in Europe.
    So Andrew how can DXY collapse ?
    You might get Aussie property riding for next 6/12 months on the last blow of the bubble, MB was right, the powers to be will resort to anything to keep the bubble going, it’s surpised me how corrupt they are
    The longer they resort to any measures to keep the bubble going the collapse will be monumental

    • C.M.BurnsMEMBER

      Several of the regular contributors on the macrovoices podcast have been speaking of the “dollar safety trade” for months; as an opposite investment theory to the “end of the USD era” advocates.

    • What about the big German banks ? Are the German taxpayers going to carry that load as the Irish and Greeks were forced to do or will the ECB share this economic poo across the ‘union’.

  4. DominicMEMBER

    No deal Brexit on deck — the EU will regret their arrogant stance in negotiations with May who they effectively humiliated her during the process. Fvck that useless Euro-trash.

    No deal, no break payment. Get stuffed.

    Then we see who suffers most at the lack of a trade deal.

  5. Remember, wherever the EUR goes so goes the AUD
    Well…yes-ish. That’s a bit simplistic.
    Where the DXY goes, so goes the AUD (inverted) is more true. It just happens that the EUR/USD pair is the major driver of the DXY. I’m not sure if this is helpful to anyone, but, well, I dunno. We do our best

    • The Traveling Wilbur

      Well, technically correct. But. No.

      You just said, essentially, A (the thing relatively measured against U), will go down when DU goes up. Neglecting to observe that although U and DU are calculated differently, they are still a measure of the same thing in the case of the US especially (that thing being trading potential on the world stage and the US special case being that everyone wants its dollars to trade in).

      Its like saying the English cricket team tops the world rankings when it does well against Bangladesh. True, but not consequential.

      Now while CB et al allegedly understand this stuff I will not attempt to explain it as I don’t, what I do know is that it simply boils down to the following (from their perspective): Eurozone slows, buys less from China, China buys less from Australia. While in parallel with that, Eurozone slows, EUR falls against USD (and therefore DXY too as an almost dead cert.), AUD does exactly the same. Definitely because Aus is shipping less to China. Possibly (I don’t know) because ALSO the effect of a falling EUR and a falling RMB on DXY. Ask an expert on that one.