Australian dollar belted as Chinese yuan breaks

See the latest Australian dollar analysis here:

Macro Afternoon

DXY eased overnight despite a weak EUR and CNY hitting an eleven year low:

Here it is with a chart to disturb the even a hardened geopolitical observer:

The Australian dollar was hammered versus DMs:

And EMs:

Gold held on:

Oil fell:

Metals do not look well:

Nor big miners:

Or EM stocks:

Nor junk:

Treasuries sold, perhaps entering Jackson Hole:

Bunds were bashed:

Aussie bonds eased:

Stocks were soft:

Westpac has the wrap:

Event Wrap

Kansas City Fed business survey missed expectations, slipping to -6 (est. +1, prior -1) in “its largest monthly drop in over three years” as respondents cited negative impacts from the latest round of US tariffs on China. US flash August PMIs were disappointing for all components. Manufacturing PMI fell into contraction territory at 49.9 (est. 50.5,) and both services (est. 52.8, prior 53.0) and composite (prior 52.6) PMIs slipped to 50.9. Markit cited a marked fall in new orders, to the slowest rise in a decade, and a clear softening of the economy in 3Q due to headwinds on spending and lower prospects for domestic growth. The leading index for July managed a mild lift of +0.5% (est. +0.3%, prior revised from -0.3% to -0.1%) but was overshadowed by the weak US August surveys above.

Kansas Fed President George spoke at the start of the Jackson Hole gathering of global central bankers, stating that she was not ready to cut rates further without seeing evidence of a slowdown, noting that the economy was in a good place. Harker said he reluctantly supported the rate cut in July to bring policy back to neutral, and thought the Fed should now remain on hold and monitor developments. Kaplan said he’d like to avoid further action but was open-minded.

Eurozone flash PMIs rose above weak expectations, although the manufacturing sector remains in contraction and Markit warned of  weakness in 3Q’19 and a technical recession (manufacturing 47.0, est. 46.2, services 53.4, est. 53.0, composite 51.8, est. 51.2). There was a more notable lift in the French surveys with a less negative outlook than that of Germany and the Eurozone.

The ECB minutes of its late August meeting underscored their weak economic outlook for the region and need to examine and implement further and substantial easing.

UK PM Johnson highlighted the potential of alternative arrangements to the Irish border backstop as he met with French President Macron and discussions were described as “complete and constructive”. The release of an Irish border paper by Prosperity UK has been seen as grounds to progress Brexit talks, although many obstacles remain.

Event Outlook

NZ: Retail sales for Q2 is expected to have risen 0.3% (Westpac expects -0.3%), vs 0.7% in Q1. The housing market slowdown and higher fuel prices explain much of the expected weakness.

AustraliaRBA Governor Lowe participates in a panel at the Jackson Hole Symposium on Saturday.

Japan: Jul CPI is anticipated to show annual headline inflation edge down to 0.6%yr from 0.7%yr.

US: Jul new home sales data is released. Fed Chair Powell delivers the opening speech at the Jackson Hole Symposium on “Challenges for Monetary Policy” (Aug 23-24).

It was PMI night and didn’t throw up much encouragement. Europe was marginally less bad:

▪ Flash Eurozone PMI Composite Output Index(1) at 51.8 (51.5 in July). 2-month high.

▪ Flash Eurozone Services PMI Activity Index(2) at 53.4 (53.2 in July). 2-month high.

▪ Flash Eurozone Manufacturing PMI Output Index(4) at 47.8 (46.9 in July). 2-month high.

▪ Flash Eurozone Manufacturing PMI(3) at 47.0 (46.5 in July). 2-month high.

The recent soft patch in the eurozone economy continued into August, according to latest PMI data from IHS Markit, with activity rising modestly amid a marginal increase in new business. The recent pattern of services growth compensating for a downturn in manufacturing was repeated midway through the third quarter. August did see a drop off in confidence among companies in the singlecurrency area, with firms becoming more wary of hiring additional staff as a result. The IHS Markit Eurozone Composite PMI® ticked up to 51.8 in August according to the ‘flash’ estimate, up from July’s three-month low of 51.5 but still one of the weakest readings for six years. Although narrowing slightly from the previous month, there remained a wide divergence in performance between the manufacturing and service sectors. Services activity continued to increase at a solid pace, with growth recorded in Germany, France and across the rest of the euro area. In contrast, manufacturing output was down for the seventh month running, albeit to a lesser extent than in July. While France was able to eke out production growth, falls were seen in Germany and outside of the ‘big-2’.

Markets don’t pay much attention to the US version, preferring the ISM, but it was not very good either:

 Flash U.S. Composite Output Index at 50.9 (52.6 in July). 3-month low.

 Flash U.S. Services Business Activity Index at 50.9 (53.0 in July). 3-month low.

 Flash U.S. Manufacturing PMI at 49.9 (50.4 in July). 119-month low.

 Flash U.S. Manufacturing Output Index at 50.6 (50.5 in July). 2-month high.

August data signalled a renewed slowdown in the rate of U.S. private sector business activity growth. The seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index dipped from 52.6 in July to 50.9 in August, to signal only a slight increase in business activity and the slowest pace of expansion for three months. Moreover, the latest reading was the joint-lowest since February 2016. The composite index is based on original survey data from IHS Markit’s PMI surveys of both services and manufacturing. Weaker business activity growth largely reflected a loss of momentum in the service sector during August. Although manufacturing production rose at a broadly similar pace to that seen in July, the rate of expansion remained softer than that recorded in the service economy. Private sector companies revealed a marked slowdown in new business growth in August, with the latest upturn in order books the weakest since the series began in October 2009. Survey respondents often cited subdued corporate spending in response to softer business conditions and concerns about the global economic outlook.

US still outperforming is the key. That keeps the EUR under pressure as we head for the ECB bazooka. Markets do not appear primed for any kind of dovish even at this weekend’s Jackson Hole event, either, after hawkish comments from FOMC Governors George and Harker overnight.

Meanwhile, MB’s other four key risks are intensifying. Hard Brexit, via FT:

French president Emmanuel Macron on Thursday cast doubt on British prime minister Boris Johnson’s talk of a Brexit deal before October 31, saying any renegotiation of the UK-EU withdrawal agreement would leave it little changed from the original.

Mr Johnson said he was “powerfully encouraged” by his meeting on Wednesday with German chancellor Angela Merkel, when she expressed hope the UK and the EU could find a solution in the next 30 days to the vexed issue of the Irish border.

…But Mr Macron, ahead of talks with Mr Johnson at the Elysée palace in Paris, said the backstop was an “indispensable” part of the accord.

“In the coming month we are not going to find a new withdrawal agreement that is far from the original,” said Mr Macron.

Merkel also clarified that she was just being polite.

There’s not much comfort about Hong Kong. Nor any progress on the trade war. The falling CNY is a thumb in the eye of Donald Trump.

And the AUD likes none of it. Especially a falling CNY. Indeed one looks a proxy for the other:

AUD is still going lower.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


    • It’s deemed to be an attempt to circumvent Trump’s tariffs. A lower Yuan partially compensates for the higher prices that importers of Chinese goods must pay.

      The US will claim the Chinese are manipulating their currency lower but the CNY has been pushing lower for ages — the authorities have kept it propped up at the magic 7 level, until recently when the trade spat gave them cover to let it slide over to the dark side.

      • Easy enough to bump the tariffs up by royal decree.

        But in any case, for the most part China’s raw materials are imported and in USD. Cash flow wins every time.

      • Some materials are imported, true. But the majority of the production cost is not the materials, it’s capital goods and labor.

      • Dominic
        It feels to me like China is going to let the peg in HKD and CNY just go
        Can they keep defending the HKD, I doubt
        I think we aren’t far away
        Things feel they are just about to hot up
        Get prepared for extreme volatility
        I think central banks have lost control

  1. @andrew @arrow
    Didn’t get back yesterday
    On transit to Bali
    Nothing like the back row of jstar with all the Aussie bogans
    I can’t believe everyone believes It’s going to be business as usual
    Things that are extremely probable and more than likely to almost certain to happen let’s say next 24 months.
    DXY higher = do we break this time not sure
    HK peg to break, dragging CNY much lower
    Euro will break up and drag GBP lower
    The strength of the dollar just creates more chaos and pushes USD even higher
    EM crisis with higher USD
    Think USD going up against everything
    So if we see USD strength for next 2 years, I think commodities accross the board will be under pressure which is consistent with a deflationary type crash
    My feeling is gold will get dragged much lower with higher dollar
    Think we just got a little taste of the equity sell off that’s coming and when they call the crash at 5800 like they all called at 5500 last time, get on the BID big time to test 7,000 ASX again
    Think at least next 6 months bond yields will go much lower into this crisis
    I feel Craig James and Bloxo have drugged HNH
    I think we are much closer to a financial crisis than is being discussed
    Look at the chaos everywhere
    Andrew I think you said DXY 150 was out there call, this will be the move that comes from a break of the Euro.
    The next 18 months to 2 years will not be business as usual and what makes me even more convinced is how complacent everyone has become
    Ps I think we will see major crisis coming in Europe this Oct Nov that will create a crisis in the Aust banking sector, I was thinking with QE could they just buy bank equity directly ????
    Think they’ll buy long dated Aussie Gov bonds and maybe buy bank equity – could someone tell me if that’s possible
    Think we will see well above 7000 ASX is this cycle

    • Structurally, it’s all set up for a much higher dollar especially given all those offshore dollar liabilities currently being funded in the wholesale market but can you imagine what DXY at 120 would do to markets, never mind 150. Powell would be out on his ear. Certainly we are moving toward the withdrawal of central bank independence altogether. I reckon the monetary policy response is going to be extreme everywhere and anywhere you look and gold will be a net beneficiary. If the dollar were rallying in the midst of an economic boom then, yes, gold would underperform but in this environment, where a laundry list of historical records have been broken already (and not in a good way), I can’t see gold going too far south from here. There is nothing normal about this environment – alarm bells are ringing quite shrilly, even if the commentariat appear quite sanguine.

      As an aside, USD/JPY is one to watch. No shortage of carry trades to be unwound there

      • I want to believe in gold from here…I just can’t….seems overbought (but, hey, so are bonds, and I hold lots of them! :P)…

        I’m concerned about a medium-term gold rout with a run to USD

      • @bcnich. Yes the JPY is a strange cat. Utterly worthless given how it’s been printed into oblivion and yet soldiers on courtesy of strong inward capital flows, some support from international reserves and perversely is underpinned by the structural short in the currency via the giant carry trade. Until recently the country had a strong current surplus so investors have been happy to stick with it. Substantial internal savings too.

    • Devil’s Advocate: how are we going to see ASX at 7000 if commodities are getting hosed by a strong USD? A huge proportion of the ASX is miners…

      Banks? Lower yields don’t help their earning, which will drag down their stocks, yes? And QE isn’t good for them either, yes?

      So if miners and banks aren’t getting their stocks pumped, then how will the ASX get to 7000?

      I’d jump on an ASX ETF and ride it towards 7000, but I’m just not sure how it will get there….?!

      Honest thoughts!

      • Fair points all. Generally a weaker AUD provides good support for stocks because of commodities – but if they get hosed because of economic weakness (rather than a stronger USD) then the index will be in trouble. I can’t see banks doing anything other deteriorate from here. Lower rates are poisonous for banks so unless we have a real surge in house prices, driven by volume, I can’t see a happy outcome. At some point the banks may be forced to pay up for term deposits if the wholesale markets become difficult, which won’t help.

      • C.M.BurnsMEMBER

        I suspect that the hypothesis is similar to what’s been observed in the US. Massive, sustained USD liquidity via financial markets (ie QE, but not helicopter money) will find it’s way into Australian dollar denominated asset markets because, it’s got to go somewhere right.

        This was observable in the US where you had the disconnect between share market rally and the experience on ‘main street’.

        For mine, i think that the australian economy is much more exposed (impact of falling dollar drives inflation, even if it gets scrubbed from the official figures) and one-dimensional than the US economy for this to play out the same where here.

      • I wrote this to arrow last year around Nov Dec when he asked why 5500 was the bottom and I said were headed to 7,000 and I was laughed at.
        Some points but not in any order
        – ASX does rise in pure USD terms as AUD falls
        – capital does chase yield but you need to know when that runs out and it was at high 6,000s this month
        – There is very little leverage now in equities, margin lending hardly exists now
        – the market is overall underinvested in equities
        The retail investor isn’t in yet
        – you can park smaller amounts in equities you can’t with property you need to borrow
        The major gearing this time around is property
        – no one gives a sxit about PE, I wouldn’t even bother looking at it
        – have a look at ASX chart it’s a beautiful and steady by the dip
        – There is no stamp duty on purchases and the fees are so low to buy and sell
        – on a $400k unit it’s $40k to get in and out Government fees agent advertising legal
        Nsbtrade $400 in $400 out
        It’s liquid funds can run to ASX.
        ETFs play a big role, they just buy and sell the index, does anyone really care how the companies are going? ETFs do make crashes much worse but we aren’t in that environment
        Australian companies are in much better shape in 08
        I’d be buying the dips big time
        There isn’t going to be a stock market crash

        Bond market crash next year or year after and property is going down – the real global bubble is government (sovereign) bonds
        Equities are safe on big sell offs
        I’m taking advantage

      • BW
        I’d like to add in that if RBA does QE, you’ll see what happened in US share buy backs etc, excess cash pour into asx
        I wouldn’t discount the possibility that we see ASX 10,000 in this cycle
        Let’s see first if we see under 6000 – my level is 5800 around, if we see around and then a bounce out, then there is a long way to run
        Think ASX will be the last bubble

    • Two things you say make me shake my head with wonder .
      1) The ASX to 7000 ? I suppose with our super funds needing to pour monthly donations into it anything is possible. The whole thing is built on lukewarm air.
      2) And going to Bali? Quite possibly it sits at last place on my “places to holiday” list

      • I agree Ding, I turn right to a very quiet location near illluwatu, the only bogans I see is on the plane

  2. The Jackson Hole Circle J#rk

    We all know where this will end up. Stop pretending you know what you’re doing and just open the spigots

  3. @Andrew
    If you are interested I was an interbank FX trader for 10 years in the 90s, I was one of the DM cross traders before Euro, in 1999, DM against FRF ITL
    I think EURO is going to break up for the same reason they shouldn’t have put together
    How does that play out, think DXY will break 130,140,150 and then break the Euro up, as we have a global crisis, money to pour out of Europe into US, and then when we have the USDDM, the strength in the USD, will create a US crisis that USD will pour back into DM (Germany)
    The EUR is on its last legs
    I’m happy to be proven wrong re a major financial crisis in next next 3 to 6 month
    Ps I’m not sure if there are any old time FX traders who read this, but there were some amazing experiences in the 90s

    • bcnich, no worries.
      I’m happy with my government bonds, and I’m still ok with my gold stocks (although with less confidence).
      Anyway, it is good to have an opinion.

      • Andrew
        i think you hold the correct things long term
        Gold mining stocks are a winner long term, I think you’ll get a chance to buy more
        I’m very interested to buy physical gold silver miners etc but I’m being patient
        I want to but agri commodities but I don’t understand them

    • Ps I’m not sure if there are any old time FX traders who read this, but there were some amazing experiences in the 90s

      I’m sure Cocaine is a hell of a drug! 😀

      • Gav
        Everyone was on coke and pills especially Sydney
        It was a great time
        Cowboy days
        Some highlights
        I was on the desk when sorros broke the BOE, I wasn’t GBP trader but sat next to, I was DEM crosses
        I opened the Euro cross market on Monday 5 am when ERM bands broke again FRF ITL etc
        I was USDFRF trader when it hit the low in 1995 around
        Traded in Asian financial crisis

        Asian financial crisis was the most scary, USDIDR, the ranges on a day were like AUS btw 60c and 75c
        Very very stressful
        I’m not sure what it’s like nowadays
        I was an Insto equities trader and bond trader
        Nothing is like FX.

  4. Belted? Here’s me thinking when I looked it would have a 66 handle ……………….

    • Lol, yep. When his hyperbole headline says belted, smashed, crushed etc, you can expect it to have dropped ten pips overnight and be up 20 by the time you read the article.

      • The Traveling Wilbur

        Except when CB is super-keen to get to the pub in the arvo. Then it’s just 10 pips.