Australian dollar shredded as Chimerica tears apart

DXY was smashed Friday night. CNY was not much better. EUR lifted:

The Australian dollar was shredded against DMs:

EMs were worse:

CFTC positioning was unchanged very short last week:

Gold hit a new closing high:

Oil was hit:

Copper broke:

Big miners sank:

EM stocks too:

And junk:

All bond were bid:

Stocks got creamed:

Chimerica is coming apart. China foolishly retaliated to Trump tariffs:

China said Friday it will impose new tariffs on $75 billion worth of U.S. goods and resume duties on American autos.

The Chinese State Council said it decided to slap tariffs ranging from 5% to 10% on $75 billion U.S. goods in two batches effective on Sept. 1 and Dec. 15. Those dates happens to be when President Donald Trump’s latest tariffs on Chinese goods are to take effect.

It also said a 25% tariff will be imposed on U.S. cars and a 5% on auto parts and components, which will go into effect on Dec.15. China had paused these tariffs in April.

And the rest is history as Trump immediately roared back:

Then, after markets closed, Trump doubled down.

And later again:

This means only one thing, one way or another. Global supply chains forced out of China. It won’t happen overnight but it will happen. China is going ex-growth before our very eyes. Brace for a major economic adjustment in Australia over the next five years.

The forex market response was to smash both CNY and DXY, as well shred the AUD. But the latter would have fallen a LOT more against the USD if it had not fallen a full cent.

Markets appear to fear that Trump’s next move will be in the forex market, to weaken the USD. But that was before he hiked tariffs after market so expect the USD to rebound today and the AUD to get pulverised.

Is Trump forex intervention a real fear? The truth is there is not much he can actually do short of taxing capital inflows, especially Chinese. He might go that way but the fear of losing an international stock and bond bid will most likely prevent it. Then again, if the blood really gets up who knows? Gold is the obvious hedge.

It is more likely that the global economy will simply crack up under the sustained pressure of Chimerica coming apart. As global growth slows, oil demand falls, prices crater, US junk bond spreads blow out, stocks crash, the Federal Reserve is forced to slash and burn, and Trump gets his lower USD that way eventually.

Fed chair Powell was cautious but is turning the oil tanker slowly that way:

Through the FOMC’s setting of the federal funds rate target range and our communications about the likely path forward for policy and the economy, we seek to influence broader financial conditions to promote maximum employment and price stability. In forming judgments about the appropriate stance of policy, the Committee digests a broad range of data and other information to assess the current state of the economy, the most likely outlook for the future, and meaningful risks to that outlook. Because the most important effects of monetary policy are felt with uncertain lags of a year or more, the Committee must attempt to look through what may be passing developments and focus on things that seem likely to affect the outlook over time or that pose a material risk of doing so. Risk management enters our decision making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy, including the natural rate of unemployment and the neutral rate of interest. It will at times be appropriate for us to tilt policy one way or the other because of prominent risks. Finally, we have a responsibility to explain what we are doing and why we are doing it so the American people and their elected representatives in Congress can provide oversight and hold us accountable.

We have much experience in addressing typical macroeconomic developments under this framework. But fitting trade policy uncertainty into this framework is a new challenge. Setting trade policy is the business of Congress and the Administration, not that of the Fed. Our assignment is to use monetary policy to foster our statutory goals. In principle, anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy. There are, however, no recent precedents to guide any policy response to the current situation. Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade. We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives.

This approach is illustrated by the way incoming data have shaped the likely path of policy this year. The outlook for the U.S. economy since the start of the year has continued to be a favorable one. Business investment and manufacturing have weakened, but solid job growth and rising wages have been driving robust consumption and supporting moderate growth overall.

As the year has progressed, we have been monitoring three factors that are weighing on this favorable outlook: slowing global growth, trade policy uncertainty, and muted inflation. The global growth outlook has been deteriorating since the middle of last year. Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States. Inflation fell below our objective at the start of the year. It appears to be moving back up closer to our symmetric 2 percent objective, but there are concerns about a more prolonged shortfall.

Committee participants have generally reacted to these developments and the risks they pose by shifting down their projections of the appropriate federal funds rate path. Along with July’s rate cut, the shifts in the anticipated path of policy have eased financial conditions and help explain why the outlook for inflation and employment remains largely favorable.

Turning to the current context, we are carefully watching developments as we assess their implications for the U.S. outlook and the path of monetary policy. The three weeks since our July FOMC meeting have been eventful, beginning with the announcement of new tariffs on imports from China. We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile. Long-term bond rates around the world have moved down sharply to near post-crisis lows. Meanwhile, the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent. Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In the end, the odds still favour a safe haven bid into the USD as things fall apart. But even without it, the sundering of Chimera is the sundering of Australia, and the Australian dollar will be destroyed regardless.

Comments

  1. I keep an eye on forex movements via the XE app and usually it does not move during the weekend (as you’d expect with markets closed).

    This weekend the AUD has dropped from 67.54 to 67.00 USD just during Sunday (about 0.8%) and is down about 1.24% against the Euro.

    So either the app is on the blink… or there is some form of extreme pressure on the AUD even during “closed” period … I don’t know enough about the mechanisms to know how that is possible… or what volumes you need to cause it… but I wonder if something preeetty interesting might happen when the markets open on Monday morning.

    • The Traveling Wilbur

      That’s the sort of thing that’s going to happen when you have programmers running the financial market’s show (via end user apps etc.)

      Some genius somewhere said, there’s nothing stopping us listing BTC and having it tradeable 24×7. After all, its a payment commodity that’s operating 24×7, so why not?

      Fine… unless you happen to need to be able to settle trades in currencies other than USD. And don’t want to be taken to the cleaners by even smarter programmers buying BTC knowing they’ll be able to cleanup bigly at times like these on the currency difference alone on closing out their position come market open.

      Or they could just dodge that problem by setting their own rates for 4X (and taking the risks that come with that for all the other exposures they have) for the weekend.

      • Indeed – good points. Middle East countries trading on a Sunday might cause the odd tangle too.

        Gap down in AUD USD is fairly modest … Looks like gold is where the action is right now!

    • It may be a delayed update or, depending on when you looked the FX and some futures markets do open Sunday evening from recollection

  2. I would say that the reason for China getting their retaliation in first is that they have decided to act on Hong Kong. The question is have they also decided to act on Taiwan as well….it is obvious that the US will use it to pull on their pigtails for ever and a day, so they may decide to rip off the sticking plaster.

  3. Anything could happen here.Five years seems a little generous given the parlous state we are already in

  4. This means only one thing, one way or another. Global supply chains forced out of China. It won’t happen overnight but it will happen.

    Can you give us some examples please ?

    Certainly not cars. Certainly not electronics. Certainly not most manufacturing so what will be forced to move ?

    Some examples would be really appreciated.

    And where are they going to go ? There is always a great deal of talk about cheap foreign labor however it simply does not work like that. None of these alternatives have both the volume of labor and the industrial / infrastructure capacity.

    The only possible alternative as Tim Cook HIMSELF declared would take minimum of ten years – absolutely minimum – and in that time the inflationary impact would be so massive it would send most companies broke.

    I really don’t think people have thought about this remotely – if at all.

      • So in your article – one product, bubble jet printers, from one company have already been moved. The rest are “may”, “might”, “possibly”.

        No changes haven been made yet, Sharp spokesman Tsutomu Hirano said.

        The reference to apparel (shoes etc) is a 100% total crock of malaka. Apparrel is the lowest of the low technical requirements and shifted production years ago.

        Sony said last week that trade-war levies may cause it to raise prices or move production of PlayStation consoles, cameras and projectors outside of China,

        It is ALWAYS the first product (along with soccer balls, baseballs etc) to appear in emerging ultra-low income economies as there is almost no technical improvement on production and its a purely wage based operation which can be quickly shifted.

        Top Japanese companies including Sony Corp., Ricoh Co. and Asics Corp. are orchestrating shifts in production away from China, joining manufacturers from other countries seeking to sidestep U.S. tariffs.

        All of the products which have been shifted are part of the “output” phase. Notice this ? The products are entirely manufactured in China and then “assembled” in Vietnam or elsewhere.

        Japanese manufacturers have been seeking lower labor costs and supply-chain diversification by moving some output out of China for years

        Literally the entire article says – Nike moved its stuff ages ago, one company assembles printers outside of China, and other companies are having a bit of a think.

        Thats it. Thats your article and it 100% backs up what I have said. Nothing happening.

        Now consider why. Move your printer manufacturing from China – then watch people walk into Office Works and one printer is $150 the other is $500 for the same thing – do you honestly believe they will be buying the $500 one ?

        End of argument.

      • If you consider well informed, considered and rational then yes. Completely desperate. Got a response or screw that lets just attack the person….

  5. Bonds bid, the USD weakens and gold rises.
    It is back to school for those predicting a rising USD and/or rising bond yields.

  6. It strikes me that anyone piling into property again on the back of the promise of much lower rates is actually running into a burning building. Liquidity turns on a dime.

  7. and CHZ could not pick a better day to announce assays from first 14 holes from Phase 2 drilling. lol

    • The Traveling Wilbur

      LOLd.

      Do you think it’s worthwhile writing to the glorious Xi and trying to explain he started all this by trying to bounce a number 11 batsman (Trump)?