Australian dollar threatens new lows as yield spreads blow out

See the latest Australian dollar analysis here:

Macro Morning

It’s gone a bit unnoticed amid trade non-deal scuttlebutt. One the primary drivers of value of the Australian dollar has been falling again and is close to new lows. Aussie bonds yields has a taken a caning in recent weeks as local data deteorates:

The local curve has steepened a little but remains inverted out to the six year, signalling high recession risk:

Meanwhile, as the US recession scare has passed we’ve seen more curve steepening there than here and the negative spreads between the Aussie and US bonds have blown out again:

The short end in particular is close to new twenty year wides:

Given the RBA is very likely to cut rates again in February, by 50bps in H1, and launch QE in H2, there is obvious scope for further widening with further Fed cuts less certain over the same time frame.

Throw in an ongoing terms of trade correction as iron ore and coking coal supply adjusts while China slows, which is the other large input into Aussie dollar value, and the case for new lows in the Australian dollar in the near future remains good.

David Llewellyn-Smith us Chief Strategist at the MB fund and MB Super which is overweight international shares which will benefit from a falling Australian dollar.


David Llewellyn-Smith
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  1. It’s about time the aussie 10 year started to stop following every move of US 10 year
    Think AUD will break 6680 support for 64s/65s, MSM will get bearish at the lows like they always do and we will have the bounce back to 66’s. seem to be the same old story, believe we are on our way to 50s next time this year, not a huge call, MB is on that one.

    Some other things I have said and have never changed from what I have written on here

    I said Gold would top out around 1560/70 for much lower. Let’s see, looks like the buyers from mid 1500s and buying here at mid 1400’s, averaging lower their longs – let’s see if 1450 clearly breaks think 1420 next if we can’t bounce from here

    What I did say when HNH told me to take my pills
    *AUST GOV BONDS will go negative, people aren’t laughing at that now and the leaders in the market aren’t far away from talking about it, I’d say IF 0.85% breaks, there will be some articles about the possibility
    *Euro to test parity and GBP to break 19 lows of 1.1900 around as DXY breaks up above 100, but that’s no big call, MB is on that one.

    Think over next 3-4 months we will see a 10-20% correction lower in equities, maybe 7,000 first in ASX200
    Did say AUST GOV bonds will go deep negative, that if we see an AUST BANK rescue of some sort in next 3 to 4 months

    Australian house prices down 25/30% by end of Q1 2021 triggered by out of cycle rises in home loan interest rates (black swan)

    I still stand by all of above

    Get ready for Q1 2020, it’s going to be a doozy

    We are in the complacent “calm before the storm”

    • Careful. Peachy will hold you to that timing. I suspect you’re right in terms of direction and scale, notwithstanding the predilection of central bankers and governments to do something even more extreme to kick the can. Timing is, as always, the issue. But while Recessionberg keeps driving us to an inane surplus and immigration destroys wages and apartment construction dries up while retail dies, anything could happen. I expect Trump is keen on kicking things along to ensure re-election and then go all out to pull the ribs out of the Chinese baby and push them into an internal crisis. At that point the Aussie dollar will have a 4 or a 5 in front of it as Trump squeezes Australia to fend off Chinese agresssion

      • Think we will see a 3 in front of the Aussie this time, 2/3 years away. Think possibility 33c, that 3 pacific pesos for 1USD.
        We got 3 Pesos for a British Pound 15/20 years ago.
        Someone can correct me but think AUDGBP was 33 pence when AUD USD touched high 47s in 2000 around

        • 42 is the answer to the question of life, the universe and everything. And the point I’d be ecstatic to sell my YANK. There are plenty of supports for the battler, but piece by piece they’re getting unpicked. Sooner or later something has to break down bigly

      • Mdsee
        Let’s keep in simple, what jobs are people going to do to pay off their home loans for 30 years.
        I am really interested to know, can someone tell me please.

    • If it’s only a 25/30% drop in house prices then we got off lightly.. I think we need a 40% drop to restore sanity..

  2. Think HNH quietly is more bearish than he writes on here but it’s too much risk for the success of MB.

    My friends think I should be putt in a padded room.

    I have started to say I am wrong at BBQ’s because I wasn’t getting invited anywhere. True.

    • People hate facing reality and hate any future reality that looks like their life will be screwed. Denial, like hope, are not strategies

    • People get nervous when I ask them to think of non-mining (ie. China) parts of the economy that are not ultimately based on debt, and housing debt in particular…there’s some good parts of our economy, but not much…