Australian dollar runs into impossible gale

See the latest Australian dollar analysis here:

Macro Afternoon

DXY broke out Friday night as EUR crashed and CNY fell:

Normally that combination would smash the Australian dollar but instead it rallied against all DMs:

And most EMs:

Playing catch-up for last week’s weakness I guess. CFTC positioning remains very short:

Gold was hit as DXY powers up:

But oil fell:

And metals beyond the nickel squeeze:

Big miners tracked the bear market rally in iron ore:

EM stocks held on:

But EM junk is breaking, a very bad sign for risk:

The Treasury curve was squashed again:

Bunds were on fire:

Aussie bonds tracked US:

Stocks were flat:

The rampaging DXY is now the central the question for  markets. The rocket fuel is a crashing EUR, via Reuters:

Traders had varied explanations for the drop, including that month-end rebalancing of portfolios heightened an existing bias. The longer-term trend, which has seen the euro fall 0.90% in August, has been driven by an economic slowdown in Europe among other factors.

“We had a quick 50-odd point drop, which seems to be month-end related. Clearly the euro has been quite soft for some time. We touched below $1.10 earlier in August and we’ve struggled really to rebound from that point. The underlying softness that we’ve seen persist in the past month seems very much intact,” said Shaun Osborne, chief foreign exchange strategist at Scotia Capital.

The move also began shortly after President Donald Trump tweeted that the euro was dropping “like crazy” and lamented the state of the U.S. dollar, attributing its strength to Federal Reserve policy. A weaker dollar would send the euro higher, suggesting the tweet did not have a direct effect on the pair. The euro was last trading at $1.0976 against the dollar, down 0.71% on the day.

Poor euro zone economic data on Thursday reinforced views that the European Central Bank would cut its benchmark interest rate and announce a new round of quantitative easing at its September meeting. Christine Lagarde, the ECB’s next president, said the central bank still has room to cut rates if necessary, though divisions remain within the ECB.

As I have pointed out many times, a falling EUR is very bearish for AUD/USD. Indeed they very correlated:

There is no doubt that EUR should be falling. The European economy is very weak and getting weaker. Led by German industry:

But drawing in services:

As jobs go:

The ECB is going have to fire off some kind of super-bazooka. And all of this before we see any fallout from a hard Brexit.

On the US side of the equation we have weakening growth but a much stronger labour market, much stronger inflation owing to tariffs, much lower exposure to falling global demand and a Federal Reserve that is more delayed by all of it, to the immense frustration of El Trumpo.

So, if we’re going to see DXY grind higher then obviously enough the AUD will grind lower. But there is another problem that could make it all a lot more volatile. A rising USD is always very negative for capital flows into EMs. They borrow a lot of money in USD-denominated loans so a rising DXY is effectively tightening monetary policy. This creates a feedback loop of capital flows out of EMs and into DXY, from the periphery to the centre.

Before long you begin to see credit stress at the margins of EM bond markets as junk spreads blow out. That is what is happening now. As DXY rises and EMs fall, then commodities give up the ghost. If oil is drawn in then the next domino to fall is the US junk bond market, followed by stocks:

These dynamics have determined every big stock market correction of the last three years and each time the AUD has gotten slaughtered as well.

If oil goes, we all go into year end.

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


    • Polar bcnich BearMEMBER

      I believe I’m right but it’s hard to convince people
      Everything is connected
      I’m not even sure what aurora is I’m not an expert
      Sunspot makes minimisation bottomed right on the collapse of Lehman
      It’s not a coincidence but it’s not the only factor
      The sun and solar system have a very huge impact
      I’m studying more and more about these effects
      Tsunamis Earthquakes Volcanic eruptions
      The best analysts take in everything
      We are getting near rye end of the fastest decline in sunspots solar cycle 24 bottoms Q1 2020
      I think we are going to see GFC type chaos in next 6 months
      Arrow let’s just see what happens by end of Q1 2020
      I think we are very close to a major financial crisis that will dwarf the GFC and no one is expecting
      Albert Edwards said maybe everyone has become complacent
      I believe this is the calm before the storm
      Thus why I changed my name to include polar bear for the last 6 months until solar cycle 24 ends



      1840s 1930s 2020s

      9 sort of upside down 6

    • Polar bcnich BearMEMBER

      Type into google
      Sunspot prediction
      Press images
      There is a sunspot chart 1913 to 2031
      Have a look at highs and lows in sunspots over 100 years , just take 2/3 minutes to look at the chart
      Top of Nasdaq 2001
      1929 stock market bubble
      GFC Lehman
      1987 Stock market crash

      What you have to understand that all these moves in the markets are based on human decision and traders are humans that react upon their emotions
      Move away from HK etc
      Just have a think about family friends right now, for me it’s chaos divorce bunkruptcy I could go on, it’s complete chaos very very close to me
      The ones who have been through these things are a little more awake
      Others call it it’s time for their Karma
      Just observe around you
      For me I can’t believe what I’m seeing

      • How does it correlate with other major events that don’t line up with sunspots?

        Are there sunspots that don’t line up with major events?

        What constitutes a major event?

        Be sure to also look up notions like correlation causation, and confirmation bias.

        Remember that an idea can be valid and well-corellated but ultimately false. That goes for any idea.

        My 2c

        • Polar bcnich BearMEMBER

          I’m not sure if we will ever know
          It’s opening your eyes through a much wider lens
          I think main stream economists have a way to narrow view
          That’s why they are ALWAYS wrong
          You need to be dumb to be paid a lot of money because that’s what most people want to hear, the truth is too painful

      • Bcnich thanks for that – I always take your posts very seriously and the sunspot idea certainly has a really intriguing correlation. I am doing some thinking about it, although my starting position is in line with Gav below and Burb above… let’s see where it ends up!

        • Polar bcnich BearMEMBER

          I was an institutional trader for 10 to 15 years in FX bonds and equities so I know that markets don’t always follow these things
          I used to be short term price maker which means my focus was more short them but being in the middle of the major global financial institutions I saw all the flows and orders so gave me a lot of inside info but on the other side it was extremely stressful because I had to make 2 way prices, so I was often caught holding something when I didn’t want to
          I don’t trade short term anymore
          Much more very long term
          Try to take a longer view
          I’ve wriiten a few times
          Think bond yields have a long way to fall
          As we head into crisis equity will be sold off heavily which is an opportunity to buy, think we will see 7,000,8,000 plus ASX
          Think USD has a long way to run higher
          Think gold will go much lower with rising dollar
          After the crash I believe you need to be diversified
          Small resi property 2 bedder inner Melb for me
          Cash notes USD and AUD on hand (I think there will be a black market for cash, think cash will be worth more than face value
          If bonds I’d stay very short end but I’d avoid banks as much as you can
          I don’t trust banks or government
          I really feel strongly that there will be a GFC type crisis that will require Aussie Bank rescue package next 6 months
          Let’s see
          Also oil energy etc
          Agriculture equities but think commodities are going to get HAMMERED into the crash

        • Polar bcnich BearMEMBER

          when I was a trader I really only looked at fundamental analysis like HNH, not much technical
          But as the years have gone on, I think technical analysis is much stronger along with cycles and nature plays a much larger role sun moon weather etc etc because they affect human emotions

    • I’m not totally opposed to the sunspot theory, but it does seem a bit wishy washy like reading star signs and horoscopes. Anyway let’s see what end of the year brings. 😁