Australian dollar smacked as commodity crisis builds

See the latest Australian dollar analysis here:

Macro Afternoon

DXY is breaking out. EUR and CNY both fell:

The Australian dollar was smacked versus DMs:

EMs were worse:

Gold was hit:

Oil lifted though:

And metals were mixed:

Plus big miners:

EM stocks gained:

And junk:

All bonds were sold:

Stocks took off:

Westpac has the wrap:

Event Wrap

FOMC member Rosengren (who dissented against the rate cut in July) said he believes monetary and fiscal policy are accommodative enough. He said wages and some inflation measures (Dallas Fed version) have increased, and is concerned lower yields could motivate excessive risk taking. He doesn’t believe a 2% growth rate is sufficiently slow to warrant easing.

Eurozone core inflation for July was finalised at 0.9% yoy, as expected, although the headline measure was revised lower from 1.1% to 1.0%.

There were more headlines on possible German fiscal stimulus plan – a contingency plan to be triggered in the event of a recession to avoid a rise in unemployment, which would see debt levels increased. Meanwhile, the German central bank’s monthly report focussed on signs of a labour market downturn and potential 3Q contraction.

Event Outlook

Australia: the RBA minutes are released. The key focus will be around the tone of the RBA’s ease further “if needed” stance as well as the new forward guidance in the August decision statement relating to an “extended period of low interest rates”.

Europe: the Italianvote of no-confidence in the Prime Minister takes place. If the motion is passed, outcomes range from a new coalition government being formed, a temporary caretaker government installed, or even elections being held as soon as October/November.

US data continues to flow much better than European and Chinese. The ECB is clearly warming up for some kind of bazooka chasing its wild negative yields:

And China is still very slow to stimulate. Yesterday’s latest fringe effort was another nothing burger, via AFR:

While Trump has resorted to the Twitter pulpit to strong-arm the Federal Reserve to lower rates, Beijing has one-upped the US President by unveiling a new policy with little fanfare that may bring down borrowing costs and bolster growth in the world’s second-largest economy.

The minutiae of China’s monetary policy can be eye-glazingly boring for the uninitiated, but the weekend move to change the way the loan prime rate (LPR) is calculated is a substantial step in Beijing’s attempts to reform and liberalise interest rates and get money flowing through an economy that has underwritten Australia’s recent prosperity.

That’s talking it up. This is fighting off rising interest rates resulting from the mini-financial crisis afflicting the mid-tier banks. If China wanted to stimulate properly it would cut the cash rate. But it still can’t for fear of a collapsing CNY. Hence these adjustments at the margin.

Thus we find ourselves back in mid-2015. US growth is out-performing. China is slowing with more ahead as property slows and Europe’s preposterous continental-scale mercantilist economy is sinking fast in its wake.

The combination leads inexorably to a forex market that bids DXY higher as EUR sinks, and CNY falls as well made worse by the trade war. As sure as night follows day, this will crush emerging markets in due course as China kills their competitiveness and DXY raises their funding costs. The next shoe to drop will be commodity prices, which make up a large component of their terms of trade.

This is the Mining GFC of 2015 returned in trade war guise. It puts the Australian dollar on notice for much lower, unless or until the Fed eases aggressively and China throws in the stimulus kitchen sink.

Watch oil. It is the key line of contagion back into the US economy. If it breaks then so will stock markets, US investment, wage growth and the consumer.

Followed by the Fed.


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  1. I think things are different this time around, my feeling there is a black swan very close, maybe it’s not Deutsche, maybe it’s Asia, who knows exactly but I don’t think we are moving into a 2015 slow down
    I think there is a one off shock that will trigger different events like a contagion and send everything nuts.
    Like MB said it’s maybe HK, i’m not sure but I feel it’s coming much worse than everyone expects
    This is not a normal slowdown. It feels like everything is going to blow together
    We are in the calm before the storm
    My guess OCT NOV

      • Unlikely. The General Electric rumours have been around since pre-GFC and markets have been suspicious ever since. The share price reflects it: peak of $60 … now trading at ~$8.50. A once great company dying on its feet.

      • HT14
        Feels to me there is a lot of things to go off together.
        Europe Draghi Leaves
        Brexit chaos
        Severe German downturn
        Major issues in HK,(will Chinese go in?) my guess is peg has to/will break next 6/12 months.
        Probably Chinese devaluation
        Deutsche GE?? what others don’t we know about
        Feels like everything is going to go off at once.
        Oct Nov is nearly always a good time for a crisis. Do most crisis happen around October??? Just feels like.
        Think MB is right on AUD pretty dead cat bounce.
        You would have to give me a very good reason why there won’t be a major crisis just around the corner.

    • I would put my money on China if it weren’t for the fact they’ve performed miracles thus far in containing their currency in the presence of gargantuan money creation. I don’t think, in aggregate, that there’s actually a shred of real capital left in their banking system — at least, if you were to account properly for non-performing loans.

      It’s a stat I come back to time and again but, since starting to liberalise their economy in the early ’80s it took c.20yrs to reach $1 trillion of bank assets and then another 18yrs to push that up to $40 trillion. Sorry, but anyone who understands finance knows that is simply not possible / sustainable. The US, an economy twice the size only has about $18 trillion of bank assets (albeit a much larger bond market, but still). It is a serious wonder that this hasn’t blown up yet.

      • What are you talking about ? Its just so obsessively selective. Here are some REAL numbers for you to ponder.

        The WEST (US / EU) has doubled their entire global debt position accumulated since the dawn of modern trade and finance from $125 Trillion to $250 Trillion in the ten years since the GFC. And you are throwing around paltry numbers like that.

        The EU has issued $16 Trillion in NEGATIVE interest rates alone. A crazy figure.

        United States corporate debt SINCE THE GFC has risen by $9 Trillion – again – just corporate.

        And then there is this

        The US, an economy twice the size

        Currently the US whose entire economic position is founded on finance with a debt position greater than the entire planet combined has a GDP of $21 Trillion for 2019 China is $16 Trillion.

        On a price parity measure China is literally twice the size of the US. Removing the US currency hegemony and their entire economy would collapse.

        Export, manufacture – every single measure outside of straight GDP (entirely reliant on US currency hegemony) puts China miles ahead.

        US combined public and private debt currently stands at $60 Trillion – their quantitative easing Q1, Q2, Q3 was the greatest largesse of debt humanity has ever seen.

        There is absolutely zero doubt where the next global financial crisis will start – the EXACT SAME PLACE IT DID LAST TIME.

      • @phrygian
        No. I think you misunderstand (or misquote) some of those numbers and the comparison between the Chinese economy and the US on a ‘price parity measure’ has been roundly de-bunked. While the US economy is undoubtedly over-leveraged it is one that was built on a sound foundation, over a period of 200 yrs. The Chinese economy is almost pure ‘fiat mirage’. They decided at the turn of the century they wanted to catch the US up and turned on the debt creation afterburners which they used to build huge amounts of industrial capacity which has been quite deflationary for the West as well as build masses of infrastructure — stuff that was needed but also bridges to nowhere, ghost cities, more units than there are families to inhabit them etc.

        This is all coming to an end. It will be ugly

    • Sitting around waiting for a black swan event is like joining a doomsday cult. Everyone in the cult tells you its going to happen but you still don’t want to give away your wealth.

      • JDIV
        I think the only people who are partly aware are people who read this site.
        Noone else has any clue, they think property is on its way up again 20%
        It’s coming and it very close.

        Think ASX will be in the 5,000s next few months, Dow still to take a beating, don;t think that sell off is over.
        Aussie bond yields much lower, you’d have to think the spread btw Aussie bond yields and US would have to widen
        I have no idea on AUD here
        I feel we are nearing a high in Gold for well lower

  2. There is no fix, but much dodging and weaving until the king hit is delivered.

    Sans any industry each cent loss of exchange means loss of import reliant jobs. How many? At least a million.

    • $16 Trillion in negative interest rate debt.

      $9 Trillion in US corporate debt.

      Last time it was the Western Banks absurd accounting chicanery which brought the entire global financial system to a crash – i think we can all put our money squarely on the same thing happening again.

  3. 2015/2016 – globally synchronised stimulus; tax cuts, china stimulus, coordinated CB easing

    It was the can kick. The end of cycle blow-off.

    The US will continue to slow as this tightening cycle flushes through:×900

    This is not a tightening that came a couple of years into the cycle, but 7-9 years into the cycle. Yield inversion is not different this time.

    Germany is probably already in recession. UK is looking to follow suit. China looking sick; with some data, in rate of change terms, last seen decades ago. I cannot see how this is going to end with a 2016 reflation; it’s already coming from a lower start point and with participant economies in far worse shape.

    • +1
      Stimulus is subject to the law of diminishing returns like everything else. One day, this will all just fall in a heap – this nag can only be flogged for so long.

    • The United States current corporate debt position stands that any collapse (recession) in profit growth will send them to the wall. Why the living Christ the $9 Trillion US debt binge is not front and center in every discussion is utterly absurd beyond all measure – its an absolutely ludicrous number and people need to understand its ramifications.

      Hand out credit cards to junkies and they are gunna max em out on crack and wont ever be able to pay them back – pretty sure there was a movie or two about Wall St Financial recklessness – why everyone has decided its no longer an issue is beyond me. Handing the crack heads the keys to the chemical stores seems to be an acceptable solution apparently.

      • It is widely covered. Who has missed the fact that half of investment grade corporate bonds are one notch above junk? Widely covered, mate.

      • IF the US corporate debt market wavers in even the most tentative manner the entire global economy will blow up.

        Same as it did last time.

        Oh – and literally never seen it covered here – all focus on China and the EU. Definitively NOT being covered, mate.

      • I’ve seen it covered many times.

        Even so, why would an Australian blog focus on the US when we are economically tied to what is going on in China?


    Keith Woodford explains how Fonterra’s Australian operations must now be centre stage to Fonterra’s financial unravelling … Interest Co NZ

    Fonterra’s announcement that it expects a loss of around $600 million or more for the year ended 31 July 2019 has big ramifications for Oz Fonterra. With overseas-milk pools now lying outside the central focus of Fonterra’s new strategy, and with Fonterra seriously short of capital, the Australian-milk pool and associated processing assets look increasingly burdensome.

    If Fonterra were to divest its Australian operations, then it would demonstrate that Fonterra really is retreating to be a New Zealand producer of New Zealand dairy ingredients. It would also reinforce the notion that consumer-branded products are now largely beyond its reach. … read more via hyperlink above …
    Google Search NZ ‘Fonterra” …

  5. Confused, you say this

    ” US growth is out-performing. China is slowing with more ahead ”

    But China is growing at 3 times the rate the US is. That is not insignificant considering it is the worlds largest manufacturer, exporter etc.

    Currently US stands at $9 Trillion in corporate debt. Several times China’s problems in its banking system – and the entire global financial malaise we currently endure is from the systemic collapse of the entire US banking system – not Chinas.

    This analysis seems blinkered to history and the actual data.

    • Currently US stands at $9 Trillion in corporate debt. Several times China’s problems in its banking system – and the entire global financial malaise we currently endure is from the systemic collapse of the entire US banking system – not Chinas.

      Strongly disagree with this; SOE debt recently peaked @ around 140% debt to GDP, a lot of which is bad debt in the making. It was China stimulus into SOE that drove the global 2016 rebound. It is the overindebtindness of SOE, and by extension, the Chinese economy that has taken Europe by the ankles and dragged it down… US to follow suit*

      *If it was the US that was causing the current malaise, why has it been a lone source of relative strength in a global economy that’s been busy grinding to a halt?

      • This is the most absurd thing I may have ever read. So China saved the world – but China is now destroying the world by dragging down the EU with Chinese debt – but the US is keeping the world afloat because it is low debt….WTF ?

        DRink the kool-aid champ – drink it hard. That is risible.

      • Crikey, getting wafts of the unhinged from you. Whatever they’re paying you, it isn’t enough.

      • Always the same story from the CCP, any article on China is deflected back to the US. You see it in every comment, in every source of media, desperate times for desperate people.

      • Isn’t this literally the same dipshut who used to post under the names of western philosophers and scientists?