Australian dollar roars at universal trade deal party

See the latest Australian dollar analysis here:

Macro Morning

DXY up, CNY more:

The Australian dollar is the toast of DMs:

EMs did a little better:

Gold held up:

Oil firmed:

Metals were mixed:

Miners to the moon!

And EM stocks:

Junk happy:

Bonds hosed:

Stocks at record highs:

Westpac has the wrap:

Event Wrap

Ahead of a meeting with his negotiation team, Pres. Trump said that the US was very close to a US-China trade deal, with media commentary suggesting that there could include a 50% reduction of tariffs on some USD360bn of Chinese goods. There was a presumption that there would also be a roll back of the intended tariffs on USD150bn of goods which are scheduled to start on 15 Dec.

The ECB remained on hold, keeping its deposit rate at -0.5%, and signalled a steady hand for prolonged period. The statement said that a highly accommodative policy is still needed and that the ECB remains ready to adjust all its instruments, but there were signs of improvement in the data which point to a stabilisation in growth. Inflation forecasts show an average 1.2% this year, while 2020 rose slightly from 1.0% to 1.1% – still well below its “near 2%” target. In the press conference, Lagarde adopted a relatively upbeat tone, citing a moderation in the region’s economic slowdown, and pledged a broad review of their monetary policy.

Eurozone Nov. industrial production was in line with expectations at -0.5%m/m, although the annual pace at -2.2%y/y beat the -2.4%y/y estimate.

US Nov. PPI inflation was softer than expected. Headline PPI was flat m/m and +1.1%y/y (est. +0.2%m/m and +1.3%y/y), and ex-food and energy PPI declined -0.2%m/m for +1.3%y/y (est. +0.2%m/m and +1.7%y/y).

Event Outlook

NZ: Manufacturing PMI rebounded in Sep and Oct. REINZ data for Nov will indicate whether the recent housing market upturn has continued.

Japan: the Q4 Tankan survey is released.

UK: the General Election result is scheduled to be announced. Polling closes at 9am AEDT and exit polls are then released. The first constituency results should be out between 10:30am and 11am AEDT but the bulk usually comes through after 12pm. The vote count typically ends around 1pm AEDT but may take longer depending on the closeness of results. In the lead up to the election, bookies’ odds implied around a 65% chance of a Conservative majority.

US: Nov retail sales are anticipated to rise 0.4% following a 0.3% increase in Oct.

And so to trade news. And it’s a deal (or not), via Bloomie:

U.S. negotiators have reached the terms of a phase-one trade deal with China that now awaits President Donald Trump’s approval, according to people briefed on the plans, Bloomberg News reports.

WSJ earlier had details of a possible outline:

U.S. negotiators have offered to slash existing tariffs by as much as half on roughly $360 billion of Chinese-made goods as well as to cancel a new round of levies set to take effect Sunday, according to people briefed on the matter, as the two sides work toward a limited trade deal that could help prevent their shaky relationship from worsening.

The offer to reduce tariffs was made in roughly the past five days, the people said, and in exchange, the U.S. side has demanded Beijing make firm commitments to purchase large quantities of U.S. agricultural and other products, better protect U.S. intellectual-property rights and widen access to China’s financial-services sector.

Should China not carry out its pledges as part of the potential deal, the tariff rates would return to their original levels, a clause known in trade talks as a “snapback” provision.

That’s pretty weak stuff from El Trumpo if it proves to be so.

Such a deal might help the rally short term but a weak deal is as bad as no deal for the future of investment certainty into China so it’s not going to do a lot for a global growth rebound beyond its positive psychological impact.

Some kind of deal looks likely now and that’s going to cut the AUD some more slack short term. Yet if it leads to a less weak (not strong!) global rebound in 2020 then it will only serve to underline Australian underperformance as the RBA cuts and brings QE.

I still see the AUD lower next year.

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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Comments

  1. This is really playing out perfectly if to continue

    We need AUD to test into 70/71c, the higher we go now the lower we go next year
    Sort of Sir Isaac Newton’s “opposite and equal reaction”
    If we see 71c then think low 60s end of next year
    If 6950/80 then Bill might but regardless think Bill is a little bullish, 63/64c
    Re Aussie bond yields I wrote early this week, we need 1.30 to 1.50% on 10 year to have the big move down to 0.50% next year
    The further we reflate now, the harder we deflate

  2. Chris might be able to confirm but looks like, the down channel resistance has just broken
    The price action in AUDUSD this morning is STOP LOSS short positions triggered, not players entering longs
    Traders will be too busy covering shorts, the traders look like they are sitting short (hoping we get a dip to cover)
    This is the point you need to be disciplined and get out
    The traders who continue to hold “bottle” is the word, buy back higher then come the tears
    No celebrating at Bar 20, that’s probably not allowed anymore but was big in the 90s
    Bit of sniff sniff and few vodkas at bar 20
    I’m allowed to say that ??

    • as I am not familiar with Oz customs can you expand more on what kind of sniffing mate? boss’s rs?

      • That’s a little joke, to add a bit of entertainment
        It’s really in the movies an embellishment of what really happened
        Maybe that lunatic in wolf of Wall Street
        What was really common was long lunches in nice restaurants

        • Haroldus
          I think that craziness was NY in those dodgey outfits that sold shares.
          The major investment banks were still very strict but long lunches and drinking was widely acceptable.
          There was also a lot of behaviour that would be classified as sexual harassment now
          What I saw was more demeaning comments and demeaning presents given to girls at that sill present swap.
          That would be never allowed these days and I haven’t worked for a large company for 18 years so not sure what it’s like these days

      • Back in the day, 25 years ago, pre-internet and electronic trading, the intermediary within Australia and overseas were voice brokers, mostly UK guys, they called them barro boys, think east london hard core guys from the 80s
        The brokers, Tullets Tokyo and Marshalls I think the names used to be the link through telephones.
        The brokerage firms had in house restaurants to save money and hosted lunches internally.
        A mate of mine who still works in Singapore says the FX market has changed dramatically since mid 1990s
        Bit one thing I don’t believe has changed is long short, stop losses and price action
        I think that is just the market regardless of how the orders are now executed

        Anyway let’s see what happens from here.
        It’s nice to reminisce but I have no desire to ever be back in the game
        It was way too stressful

        • I have an older friend who was head of the Australian proprietary desk for a major international bank a while ago…

          He got out with his life, he said – obsessed with money all the time; the stress; he said the culture was overwhelmingly unhealthy; said it didn’t help that he was frequently placing $100M+ trades…

    • on more serious note.. “The price action in AUDUSD this morning is STOP LOSS short positions triggered, not players entering longs” – how can you tell for sure it was shorts being covered. Best I can see is shorts positions from 5 days ago which does not tell me what is happening on the day.

      • Nikola
        I was on the FX interbank desk for 10 years, some time on the AUD
        It’s 7.45AM Sydney time at the end of NY market becomes much thinner and AUD gaps up
        I looked it was 6885 then 6910
        I haven’t worked in FX for a long time but price action has that feeling
        The shorts (market is still short AUD) will be getting concerned about holding
        My feeling is traders are caught short
        We are all guessing

        • Stewie GriffinMEMBER

          Agreed – market is still heavily short and covering could drive it all the way up to 7000, or even 7050. Doubt it will get back to 7100. I’ll be looking at re-entering shorts from above 7000 once net positioning declines.

          • Stewie I agree with you, think once the shorts are gone, and that may occur by staying at low 70s for a while for players to turn long.
            I think there will be genuine long term selling orders in low 70s

          • 6940 pretty quick
            let’s see where we end up at the end of today
            Market was long USD overall, we needed this sell off

          • I’m no trader, but things do seem setup for another run into 70/71…think I will buy some more YANK up there (I’m a pleb, so it works for me)…

            Just need patience….and $ 😛

      • Nikola
        6905 to 6940
        That is major Stop loss buying
        Traders are caught seriously short and Singapore isn’t in for a couple more hours.
        Traders are getting crucified

  3. Whatever China agrees to buy extra from US it will be something they will not buy less from a US ally. China will be plenty stupid to punish Russia in order to make US happy.
    Also, if China manufacturing is helped by this deal it would mean less incentive for China to invest/stimulate in empty cities in order to keep its workforce busy.
    If my assumption is right then I am not sure why AUD is going up.

    • Exactly. I’ll believe it when I see it.

      The antics of the last year or more would make this one of the most thoroughly priced in non-events in market history.

    • I agree I’ll believe when I see too but I’d like to see if any deal really actually restores the fall in global trade

    • Gav a deal was always going go come. Trump’s position was to stand tough against China, screw them over (the US people really) and make himself look tough, then accept any old deal that came along – my view it would be about exactly where it left off in balance – he will get some great concessions and crow about them, and lose other things which will be glossed over.

      Trump is rebuilding manufacturing and farmers – his bread and butter. He will crucify his opposition in California, Oracle just moved their annual $65 MIllion even to LA. He has already built new car manufacturing plants and will secure China purchases of things like corn, grain, soy and pork – easy things to do.

      China is imposing tarrifs on US cars and I reckon the US will do the same and build these back up – maybe even things like steel – he is just restoring yesterdays jobs.

      Microsoft, Google Chrome, Apple all just got thrown under the bus by China wiping out their largest market share on earth. For ever Facebook, Google, Amazon, Twitter there is a Chinese equivalent twice the size – make that three times the size at least. Europe and even Australia are also gunning for these guys with tax, control, encryption, media monopoly, government propaganda issues – their days in the wild west are numbered big time.

      I think there will be deals around energy in there somewhere – not fossils but green tech, electrics etc. as well, maybe even infrastructure.

      One thing Donald can do – is deal. It amazes me that people write him off in this regard.

  4. Trump is going to sell out the US and the world. Typical m.o. Make a big issue. Look like you’re working. Claim victory when you actually lose. Only this fool could lose this particular trade war. Someone put a bullet in this guy.

    • A bullet would cause a civil war in the US – or near enough….my conservative US acquaintances are absolutely gaga over Trump…I mean, nuts, off the planet, doing everything to say he’s the greatest thing since sliced bread. They have gone bat-crazy Nationalistic and Trump is their Strong Man Saviour I point my concerns out to them, but they deflect and double-down. Democrats, immigrants, China, anti-gun people, Socialists, etc, are the causes of all the world’s problems (I exaggerate, but it’s not far from accurate…).

      • You’re mainly hearing this from old people who don’t have the stomach for any real conflict. Their concerns are real. Trump has tapped that vein among them, but not only has he failed to deliver, but he has made all of those issues arguably worse or had no effect at all.

        Perhaps it would be better for all if he choked on his Sausage McMuffin.

        Perhaps it would be bett