Australian dollar skyrockets as China’s tyrant blinks twice

See the latest Australian dollar analysis here:

Macro Afternoon

DXY held its ground last night as CNY rolled and EUR slowed:

The Australian dollar skyrocketed against DMs:

And EMs:

Gold was hosed:

Oil was firm:

Metals jumped:

Big miners too:

EM stocks gapped higher:

Junk took off:

Treasuries were a bath of blood:

And bunds:

Plus Aussie debt:

Stocks to the moon!

Wrap from Westpac:

Event Wrap

Upbeat US data boosted sentiment. The Services ISM index easily topped expectations in August rising to 56.4 from 53.7, a welcome beat after the lousy sub-50 ISM report for the manufacturing sector earlier this week. New orders rose back above 60 but export orders and employment both cooled. On a more cautious note, Markit’s Services sector PMI for August was revised lower to 50.7 from an earlier preliminary read of 50.9. The ADP private payrolls survey showed +195k new jobs in August, comfortably outpacing expectations (+148k) and underscoring ongoing US labour market resilience. US factory orders rose 1.4% in July, slightly above expectations; the detail was a touch more cautious; core capital goods orders were revised to show a smaller 0.2% from a preliminary estimate of +0.4%.
German July factory orders fell -2.7%m/m (est. -1.4%, prior +2.7%m/m), taking the annual pace down to -5.6%y/y (est. -4.2%y/y, prior -3.5%). Although volatile of late, the sharp fall is more consistent with the marked weakness seen in order components of survey data and provide further evidence of a potential slide into recession.

Brexit took a slight backseat as the extension bill progressed in the Upper House (of Lords).

Chinese Vice Premier Liu held a phone call with US trade representative Lighthizer and Treasury Secretary Mnuchin on Thursday morning Beijing time, upon the U.S.’s invitation, the Chinese Ministry of   Commerce said in statement. Work-level negotiations will be held mid-September to prepare for senior trade talks in early October in Washington.

Event Outlook

Europe: Q2 GDP 3rd estimate is likely to be confirmed at +0.2%. Jul German industrial production is released.

US: Aug non-farm payrolls are anticipated to rise by 165k. The unemployment rate is expected to hold at 3.7% and average hourly earnings are seen to rise 0.3% (but due to base effects, the annual rate would slow to 3.0%yr from 3.2%yr). Fed Chair Powell speaks on an “Economic Outlook and Monetary Policy” panel in Zurich.

Quite a 24 hours period. MB’s four horsemen of the apocalypse have all turned tail and run together!

First, Brexit is in serious doubt, via the FT:

Boris Johnson on Thursday threw down the gauntlet to Labour to vote for a snap election next week, but party leader Jeremy Corbyn appears increasingly likely to reject what he regards as a trap.

Some of Mr Corbyn’s senior aides have been keen to trigger an election as soon as possible, worried that Labour will look cowardly if it refuses to back an early poll.

But Mr Corbyn is increasingly sympathetic to Labour MPs — including shadow ministers — who do not want to have an election until after October 31, the scheduled date for Brexit.

These MPs fear that Mr Johnson could win an election on his preferred date of October 15, and then take Britain out of the EU without a deal.

This view is shared by the Liberal Democrats, Plaid Cymru, the Independent Group and some — if not all — Scottish National Party MPs.

There is also the new Italian Government deal which has put MS5 together with a less eur0-skeptical party. It was a good day for Brussels.

Second, Hong Kong has its offer, HKFP:

Chief Executive Carrie Lam has said the extradition bill can be withdrawn from the legislature with “no debate and no voting,” in a bid to reassure the public a day after she announced the decision.

Netizens on Wednesday noted that Lam said her security chief will “move a motion” in the legislature to formally withdraw the controversial bill. Sceptics — including the protester-organised Citizens Press Conference — said that the motion could be blocked by the pro-Beijing majority in the Legislative Council, meaning the bill would not be axed.

Speaking to the press on Thursday, Lam tried to dispel speculation about ulterior motives behind her move.

“Since my announcement, I noticed that there are still some worries about this particular procedure. I want to reiterate here that the sole purpose of the LegCo procedure is to withdraw the bill,” she said.

“This involves the Secretary for Security, as the responsible government official, to announce in the Legislative council that the bill will be withdrawn. There will be no debate and no voting.”

Adding to a clear sense that the Chinese tyrant, Xi Jinping, has had a sudden realisation that he’s overreached on all fronts, there’s a trade war thaw, via Bloomie:

China and the U.S. announced that face-to-face negotiations aimed at ending their tariff war will be held in Washington in the coming weeks, amid skepticism on both sides that any substantive progress can be made.Chinese Vice Premier Liu He agreed to a visit in “early October” during a telephone call on Thursday morning Beijing time with U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, according to a statement from China’s Ministry of Commerce.

A cautious statement from the USTR’s office confirmed that ministerial-level discussions will take place in “the coming weeks,” without specifying when.

…“Neither China nor the U.S. want to be blamed by the rest of world for escalating the trade war and damaging the world economy,” said Zhou Xiaoming, a former commerce ministry official and diplomat. “But the talks don’t mean the two sides will inch closer or that their stances soften.”

This is what Xi Jinping should have done from the beginning of both issues. Taken his medicine then gone back to thin-slicing over the long run. Or is it all just bluster and bull? Probably. That said, the combined easing of HK and trade tensions is interesting.

Finally, oil is improving, for now, with US inventories breaking lower for both crude and gas:

It may well be seasonal but it is what it is.

With all four of MBs horsemen of the apocalypse turning tail and running, the reversal in markets and the Australian dollar makes plenty of sense.

Whether it marks a genuine turn only time will tell.

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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  1. Polar BearMEMBER

    Don’t be fooled, this is all aimed at tricking us, these are beautiful false moves that we needed, nice sell off in Aussie bonds, oil rise really faded nearly $58 then lower
    Nothing has changed
    Aussie 10 year yield now preparing to head towards inversion, Aussie 2/10s to invert
    Nice rally in equities before the big sell off into Xmas, very nice rally in the GBP before testing 1.20 and much lower towards parity, along with Euro, rising USD and sell off in commodities, oil gold etc
    This is the gift given to us to re enter positions
    No idea AUD guess just dragged around with all the above and Aussie gov bond yields well on track for negative status by Xmas & RBA cash rate zero by then as well
    Hold strong with your view

    • I sold 30% of my gold holdings 48hrs ago and then kicked myself for being too early — now looking a very good move. It’s rare that you pick the top of a rally but you take the luck when it comes your way. Just need this Xi / Trump love-fest to drive the price another $150 lower and it’ll be time to buy back in.

      The Chinese know the gig is up. Their banks are rooted and cannot assist the economy. Meanwhile the CCP are wedged between the trade war and and several hundred million workers whose standard of living is starting to be challenged by the economic environment. No wonder they went soft on Hong Kong. Too many battles on too many fronts.

      • Dom
        I think gold is going much lower than $150 from here
        Gold hasn’t yet encountered the rising dollar

        • The rising USD I assume? If so, golds decline will be limited as the AUD tanks along side it. Just like we saw in the GFC. Especially now that we have low rates and an RBA talking QE.

          • Yes in most part that’s what I think
            Did think AUD market was s bit short at high 66s
            Would be nice to see above 6850 maybe 6920 to clear a few specie shorts
            Long tern shorts I believe will just hold ground
            Think AUD can fall with reasonable market short position

          • Well, however it goes exactly, my fingers are crossed that your predictions come to pass. This country needs saving and a crash will potentially be a first step towards that.

          • Zulu
            Think Gold has or is near highs in USD.
            It depends on the USD, USD is slowly pushing up, think once we break 100DXY that’s it the Dollar rally is the underway, that will then be top in gold

      • Gav
        This is what happens
        I was out with a group, smart guys, that are or have been full on bears, they’ve thrown the towel in.
        It’s coming, not 18 months sooner
        Sounds like you’ve thrown the bear towel in too
        HnH I think has slowly conceded too
        I was the only bear left at the table

  2. reusachtigeMEMBER

    The higher the dollar the better as it allows us to purchase more for less, which is a great thing. Our dollar has been way too low for way too long. Times were much much better when we got over $1 US for our troubles.

    • Although said in jest, you are absolutely correct! You can always measure the wealth of a country by its currency — the more it buys, the wealthier the citizens.

      Venezuelans can explain this principle with great clarity.

      • Well technically, you can measure the wealth of a country by the value of it’s currency multiplied by the amount held, if one was a pedant.

        • Not quite how it works – if it did you could theoretically make yourself wealthier by printing more money.

          Wealth is really linked to productive assets not bank deposits, which are more a reflection of bank debt than wealth.

    • A country’s strength is the ingenuity and innovations of its people, the liberties and freedoms of its citizens (not required government prescribed), high societal cohesion and civility, justice without fear or favour (i.e. not social justice) and care of most vulnerable in society.
      The dollar will never move by these measures, but at least a persistently low dollar necessitates a change.

  3. Just looking at that gold chart above
    Maybe we’ve seen the high in gold
    If 1480 breaks looks like it could go much lower
    I think we need to keep a close eye on that gold chart (IN USD)

    • My positions is that gold is a different asset class now and in the mid term future that it was say 12 – 18 months ago. Somehow its another weapon (offencive or defencive) in the trade / currency / geopolitical wars. By the way, I don’t see this current US China dispute as a trade war but a war of hegemony. Conclusion is that I believe gold and dollar can rise at once in fact it would be my war plan for exactly that.

    • proofreadersMEMBER

      And the greatest economic managers, treasurer, central bank and financial regulators and the most prudent private banksters.

      • We have a Steve Smith economy. The technique may look terrible but we keep scoring bigger numbers…

  4. My best guest about Xi’s change of tone, is someone finally summoned the courage to report the actual figures to the Emperor.

    As to HK, Carrie Lam has now been thrown to the angry mob. She can’t resign, as I expect she’ll be charged with corruption and arrested.