Australian dollar rocket flames out on trade jitters

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was down. EUR and CNY up last night:

Despite these perfect conditions for the AUD, it fell:

Gold rebounded:

Oil fell:

Metals were stable:

Miners rallied with iron ore:

EMs stocks power on:

Junk has rolled:

All bonds were belted again:

Stocks lifted again:

The news flow was dominated by US inflation and the ECB. The former was quite warm:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in August on a seasonally adjusted basis after rising 0.3 percent in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

…The index for all items less food and energy rose 0.3 percent in August, the same increase as in June and July.

…The all items index increased 1.7 percent for the 12 months ending August; the 12-month increase has remained in the range of 1.5 to 2.0 percent since the period ending December 2018. The index for all items less food and energy rose 2.4 percent over the last 12 months, its largest 12-month increase since July 2018.

But remember, all that matters is the green line and it is thoroughly contained still.

The ECB fired its bazooka pop gun:

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

(2) Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

(3) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

(4) The modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) will be changed to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy. The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.

(5) In order to support the bank-based transmission of monetary policy, a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.

Draghi called for fiscal stimulus as well but that will take changes to Maastricht and that means giving up the German credibility that that nation uses crush everyone else:

I can’t see much fiscal support coming. On balance, the ECB has not done enough to lift the economy, not that it has much else it can do, so Europe keeps relying on everywhere else.

That brings us to the trade war which was a night of dueling leaks. Politico said the White House is desperate:

President Donald Trump’s top advisers are rushing to find an escape hatch for a series of tariff increases in the coming months, worried about the potential for further economic damage.

Many of the president’s top economic officials are trying to resurrect the terms they previously were negotiating with China, a deal officials said was “90 percent” done before a sudden impasse this summer, according to a person familiar with the discussions.

That approach was rejected by the Chinese at the time, so it’s unclear whether the new effort will overcome those hurdles and deliver U.S.-sought commitments from China on agriculture, intellectual property and technology transfer.

The goal of the internal administration discussions is to forestall October tariff increases and the next tariffs set to take effect in December, with some advisers arguing that the economic hit is real and must be mitigated prior to the election year. But the discussions remain fluid and Trump has yet to endorse an approach.

The internal discussions were confirmed by two other people close to the talks, who cautioned that nothing has been finalized.

What’s different now is that administration officials are hoping to leverage a possible stalling of additional tariffs to get China to make commitments on intellectual property, said one of the people.

“We are looking for the Chinese to give us what we asked for in May,” the person said.

Immediately denied by the White House:

Here’s a snap shot of the other rumours, from Sinocism:

China, U.S. working groups to meet soon: MOC – Xinhua

Ministry of Commerce (MOC) spokesperson Gao Feng expressed hope that the United States will meet China halfway, take concrete actions and create favorable conditions for the consultation.

“This is in the interests of both China and the United States, and the world as a whole,” Gao said.

On resuming imports of agricultural products from the United States, Gao said Chinese companies have started to inquire with U.S. exporters about the purchasing prices of agricultural products, including soybeans and pork.


China’s Mofcom spokesman Go Feng said there is no such thing that China would only make agri purchase if the US relax sanctions on Huawei.. He added that China’s “bottom lines” on trade have not changed.


Zhong Sheng of People’s Daily praises Trump for the tariff delay and said more goodwill is needed for future trade talks. It cited US media in saying that Trump did it out of concerns over economy, and also to respond to China’s earlier goodwill of exempting some US goods from the new tariffs.


An earlier Zhong Sheng commentary (before Trump’s delay of tariffs) said the exemption of US goods is a “rational decision to look after the bigger picture”. It said the move is out of concerns for the wellbeing of Chinese people and foreign companies in China, and it would be very wrong to see it as a signal of China’s weakness.

Chinese vice premier meets USCBC chairman – Xinhua

Chinese Vice Premier Liu He on Thursday met with Chairman of the U.S.-China Business Council (USCBC) Evan Greenberg in Beijing at the latter’s request.

Liu, also a member of the Political Bureau of the Communist Party of China Central Committee, said China welcomes the U.S. side’s latest decision to delay an increase in tariffs, which was previously scheduled for Oct. 1.

Critical window is about to close for U.S.-China trade deal – Axios – Kevin Rudd – September 11

What’s needed: Both sides recognize the need for a more positive political atmosphere before the negotiators meet.

China could place large orders for American soybeans and corn, while the U.S. could defer the additional 5% tariff poisonously timed for Oct. 1, the 70th anniversary of the founding of the People’s Republic of China.

The Trump administration could also issue permits for some U.S. firms to sell nonsensitive applications to Huawei — permitted under the company’s current status as a listed entity.

What’s next: The 2 months ahead are critical. The Nov. 16 Asia-Pacific Economic Cooperation summit is the last chance to sign an agreement before the window closes.

China Seeks to Narrow Trade Talks With U.S. in Bid to Break Deadlock – WSJ

China is looking to narrow the scope of its negotiations with the U.S. to only trade matters, putting thornier national-security issues on a separate track in a bid to break deadlocked talks with the U.S.

Comment: I don’t think this actually a new approach, haven’t they tried this before?

In preparation for a new round of talks scheduled to take place in Washington early next month, Chinese negotiators are making plans to boost purchases of U.S. agricultural products, give American companies greater access to China’s market and bolster intellectual-property protections, these people said

Comment: Also don’t think this is new

Taiwan steps into trade war breach for US, saying it will buy US$3.6 billion in American agricultural products | South China Morning Post

Taiwan said that during a trade mission led by Chen Junne-Jih, Taiwan’s deputy minister of agriculture, a letter of intent would be signed next week with US grain and meat exporters. The venue chosen for the signing, the Congressional Visitor Centre in Washington, a gathering place for tourists visiting Congress, signals the apparent political as well as economic dimension to the purchase.

There is clearly will to de-escalate on both sides and while that prevails the Australian dollar can keep rising.

But there is no deal because there is deal to be made.

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.

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