Australian dollar hangs on amid spiking global recession fears

See the latest Australian dollar analysis here:

Macro Afternoon

DXY faded last night as EUR rebounded and CNY fell:

The Australian dollar rebounded against DMs:

And EMs:

Gold held its gains:

Oil dropped heavily:

Metals fell:

And miners:

Plus EM stocks:

But junk lifted:

As Treasuries were bid:

While bunds sold:

And Aussie bonds rose:

Stocks were firm:

Saudi reassured, via Bloomie:

Saudi Arabia attempted to move beyond the worst oil disruption in its history, assuring the world that crude exports will not suffer, its damaged facility had partially restarted and production capacity would be back to normal within months.

…“During the two past days, we managed to contain the damage by recovering more than half of the production that we had lost during that terrorist attack,” Energy Minister Prince Abdulaziz bin Salman said at a briefing in Jeddah. “Thus the company will be able to meet all its commitments to customers this month by drawing on its crude oil reserves.”

Abqaiq has restarted and is now processing about 2 million barrels a day, said Aramco Chief Executive Officer Amin Nasser. The facility should return to pre-attack levels of about 4.9 million barrels a day by the end of September, he said.

So that leaves us largely with the geopolitical question. It’s still about scuttlebutt, via NPR:

U.S. surveillance satellites detected Iran readying drones and missiles at launch sites in Iran before Saudi oil facilities were attacked on Saturday, according to two Pentagon officials.

The officials tell NPR that U.S. intelligence views the activity as “circumstantial evidence” that Iran launched the strike from its own soil.

Saudi Aramco has said the attacks on its plants in Abqaiq and Khurais were “a result of terrorist attacks with projectiles.” Iranian-backed Houthi rebels in Yemen claimed responsibility for the attack, but U.S. officials have accused Iran of playing a key role.

The two officials say the U.S. Defense Department has sent a forensic team to Saudi Arabia to examine wreckage of drones and missiles used in the attack. Intelligence experts say the outcome of those examinations could provide “compelling and convincing” evidence that Iran was behind the attack.

And BBC:

The US has reportedly identified locations in Iran from which drones and cruise missiles were launched against major Saudi oil facilities on Saturday.

Senior US officials told media outlets that the locations were in southern Iran, at the northern end of the Gulf.

Saudi air defences did not stop the drones and missiles because they were pointed southwards, to prevent attacks from Yemen, they added.

Iran denies involvement in the attacks, which disrupted global oil supplies.

Yemen’s Iran-aligned Houthi rebels said they had launched the drones that struck the Abqaiq oil processing plant, the world’s largest, and the Khurais oilfield.

This is diplomatic pressure on behalf of allies. There is no upside in greater US entanglement. Still, oil is not going to retrace until this is resolved one way or another.

UBS gives us take on what means for forex:

The negative oil-dollar correlation has been fading

US oil production has experienced a sharp increase in recent years, with the oil investment contributing to GDP growth since 2016 and moving the US closer to energy independence. If higher oil is no longer negative for the US economy this should change the nature of the USD-oil correlation. Indeed, we find evidence of that in the correlation between broad USD TWI and oil, which has been negative historically, but is increasingly showing signs of a structural break (Figure 1).

USD to remain strong: watching China growth and US inflation expectations

Among the most persistent questions for FX markets is how long the USD can remain strong. We’ve discussed the parameters for reversing the strong dollar environment: a rebound in global growth and a reduction in the USD’s yield advantage. Clearly, the spike in oil prices leads to neither. A supply-driven oil shock is likely to be a negative drag on China’s growth while pushing up US inflation expectations (2y inflation swaps are up about 12bp). This is not a recipe for USD weakness.

I mean, is it any wonder?

In the meantime, BofAML’s monthly fundie survey says it all. Recession is now the key concern:

As trade war worries mount:

Inflation is a goner:

So buy bonds:

Not growth:

Until something changes:

I hate being on the right side of this survey. But, for now, I am. More to the point, it remains AUD bearish, if a little stretched.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Latest posts by David Llewellyn-Smith (see all)


    • Yup, it was always the case. Talk of ‘normalising’ after 8yrs of QE and zero rates was BS, all ends up. Once you go down this rabbit hole there is no prospect of reversal. The end game dead ahead.

      Talk of us all ‘becoming Japan’ is nonsense. The only reason they’ve sustained themselves all this time is because they’ve used the rest of the world as a crutch. If we’re all ‘Japan’ who do they (or anyone else) have to lean on? MMT for as far as the eye can see, until …. /

      • My question is – where is all the money? I suppose that is the burning question for everyone?
        Issue of UST – Does Treasury buy up all it needs for the next 3 months all at once or is it a continuous recycling programne?

        • Where is all the money?
          Long story but it has to do with the financial system funding all their loans in the wholesale / short term market.

          (Bear in mind that only a small proportion of all the money supply is actually permanent. Most money (credit) is lent into existence and disappears when the loans are repaid).

          Back to the funding crisis: when the US Treasury issues bonds it sucks money out of circulation meaning less money available to financial institutions to ‘fund’ all those longer term loans: for example, a bank makes a 2yr loan for $1m. They are not lending money they have in their possession – having made the loan they then need to borrow $1m from somewhere to balance the books. Typically they will borrow this overnight or perhaps a term loan for 1 week, 4 weeks, etc. And they keep rolling this short term loan until the original loan is repaid. A bit confusing, I know, but that’s how it all works.

          The reason there is funding stress is that the Treasury is building a war chest of funds (from under $200bn up to around $400bn). These funds will be spent at some point but in the meanwhile they will out of circulation while parked at the Fed. The dollar is in demand so funding rates are being squeezed.

          • Yes That was my figuring too. It can only be Treasury hoarding funds for later or overseas hoarding actual USD instead of Treasuries.

      • pyjamasbeforechristMEMBER

        Yep end game – helicopter money (printed for real not QE) to households while slowly raising interest rates is the only way to restore some normality to debt levels and interest rates. The globe is in the same boat so they’ll all debase their currency at the same time once it starts. Buy gold. Bonds will look great until it starts then they’ll get smashed as rates rise.

        • It’s not that easy. Your aim seems to be to absorb all the helicopter money into savings to reduce debt etc – all commendable sort of. However that is still staus quo as far as the macro economy goes. The consumer is still over-spending at current levels and governments are still over-spending at current levels. So your helicopter money doesn’t change the underlying imbalances. In fact it sets us up for more even bigger problems later.. The overall debt level remains the same. The current economy, in the US, Aus et al, relies on increasing consumer spending and increasing debt levels.
          There are quite a few roads to the hell we face. Our current path is one. Helicopter money is another.
          P.S. The real path is increasing interest rates, while somehow holding down the currency, and reform of the whole economic, industrial, population distribution, education and social system.
          Good luck with that at the next election!!!

          • What is everyone’s view/risk of holding USD in an ETF like Beta Shares to minimise risk against potential negative interest rates /cash ban being applied to Australian cash bank deposits and potential fall in the A$. Also is it as liquid/safe as it states that it is backed by US dollars held in a bank account with JPMorgan, Royal Bank of Canada and Mitsubishi UFJ versus say using an platform like Transferwise to buy and hold US currency?

        • That’s it, in a nutshell. Anyone who doesn’t own valuable (real) assets when this unwinds is going to discover what a serious step-down in living standards feels like. And most won’t recover.

    • ….that chart is not bullish.

      It’s clear that for global GDP to turn up, there needs to be back to back quarters with 60-100% of global GDP registering rising PMIs. We’re in the 20-40% range. Remove the chop of single quarter moves and you see a downward trend.

      Re: optimism, it’s great, so long as it’s not blind optimism. Especially true at the end of the cycle.

      • Thx Brenton.
        I could see the chart was spun, but couldn’t put specifics on it like you can. I am having trouble with optimism/functionality currently as it seems more murky than usual to me…… Sitting back till I can see clear.