Australian dollar sags on trade rumour mill

See the latest Australian dollar analysis here:

Macro Afternoon

DXY slumped last night:

But so did the Australian dollar:

Gold firmed:

With oil:

Copper is trying:

Miners firmed:

With EM stocks:

And junk:

Treasury curves flattened:

Bunds steepened:

Aussie split the difference:

Stocks are stuck:

Westpac has the wrap:

Event Wrap

US NFIB small business survey rebounded more strongly than expected to 104.7 (est. 103.0, prior 102.4) and remains firmly above its long-term average. Earnings were the main factor (second highest on record).

ZEW expectations surveys for Germany and Eurozone rebounded more than expected, to 10.7 (est. +0.3, prior -2.1) and 11.2 (prior -1.0) respectively, following -40 readings in August.

US officials Ross and Mulvaney said that US-China Phase 1 trade negotiations were progressing well, that meeting the 15 Dec. deadline was dependent on further progress, but suggested that further tariffs were unlikely (mirroring comments in the Asian media), without ruling them out.

US officials said that the USMCA was extremely close to being signed (if not today, then during this week). US Democrats Pelosi and Cuellar said that it should be voted on in the House next week.

US Democrats announced that the Presidential Impeachment process would continue on the counts of “Abuse of Power” and “Obstruction of Congress”. The White House said that Trump would address the charges in Senate.

Event Outlook

NZ: The half-year fiscal update (HYEFU) will be released at 1pm today. We expect an increase in spending to be announced, while respecting its Budget Responsibility Rules.

Australia: Dec Westpac-MI Consumer Sentiment is released.

US: the FOMC policy decision is universally expected to be on hold. After the October meeting cut, guidance is now that they will “assess the appropriate path” whereas previously would “act as appropriate”. This indicates the FOMC are in monitoring mode and December’s updated forecasts should reflect that stance. Nov CPI is anticipated to show annual headline inflation increasing to 2.0%yr form 1.8%yr while core inflation holds at 2.3%yr.

I am at a loss to explain the AUD dump versus falling USD. I guess it’s the sum total of trade rumours though they did not seem too bad.

The ZEW is worth a look:

If that persists it could lead to a stronger EUR and AUD next year than I currently expect. That is not my base case but it is a risk very much worth bearing in mind. Some see that outcome, via Bloomie:

Rabobank and Nomura Holdings Inc. see the Aussie dropping about 5% to 65 U.S. cents by December, wrenched lower by cooling economic growth and a dovish central bank. Others disagree: the currency may jump 14% to 78 U.S. cents in the same period on easing U.S.-China trade tensions, according to Monex Europe Ltd.

…Not everyone is bearish. Morgan Stanley says the Aussie may rise to 71 U.S. cents by the fourth quarter as an improving Chinese economy fuels demand for the currency. Bank of America Merrill Lynch tips the Aussie to rise to 73 U.S. cents by the end of 2020 amid a recovery in global growth.

…Rabobank strategists see the RBA potentially embarking on QE in 2020 as the Federal Reserve resumes cutting U.S. interest rates.

Rabo is right. The base case is for an ongoing weak domestic economy as construction busts, the consumer remains in her shell and the terms of trade fall.

That’s good insurance for AUD bears even if the global economy lifts more than expected.

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

Comments

  1. AUD looks like 65/70c range, market looks like its positioned too short for a major fall.

    Gold may drag it down if we break lower.

    2 good trades for 2020

    * Short Gold in USD
    ** Short Aussie property, 2020 is the year we start seeing the falls for the “The Great Australian Property Crash”, down 30 to 50% by end of 2021. It’s coming.

    2020 the major sell off in commodities (gold, silver, oil, iron ore etc), it may even be that it’s the other way around, the commodity sell off may push the USD up. Is that possible?

    • Re the Aussie, don’t think we get too extreme, it would be perfect, to see a break of 70c to get everyone bullish and take the shorts turn market a little long, even 7040 is a level I’ve been thinking for a while, sits in low 70s then the move down.
      I’m pretty sure we will see low 60s next year.

    • “the commodity sell off may push the USD up. Is that possible?”

      I think people will settle in USD? If yes, then that will increase demand for USD and tend to push it up.

      My 2c

    • I’m looking hopefully for a last week before Xmas slump in the AUD.

      We have labour force figures coming out plus Trump’s 15 Dec deadline for tariff hikes. If both come out all doomy then we might see the AUD take a nice little bath.

      Personally I think labour force will be weak (AUD down) but trump will extend the deadline (AUD up more) so the full doom picture won’t happen. Oh well.

      • You may be right Arrow, I really don’t have a strong view and I’m slightly leaning to your view too,

    • bcnich
      What I think is that the USD is the key. It is at an incredible high considering the borrowing needs of the US with a trillion dollar budget deficit and 500 bill $ trade deficit. Also it is worth considering that the creditor countries need to fund this with say euros or yen when the euro has gone from 1.60 to 1.10. That is a lot of euros. A possible scenario is that the dxy falls and the $A stays at a similar level of 65-68 whilst the USD falls in TW terms. Then gold, oil and commodities generally have a rising bias. Then interest rates worldwide rise as the inflation from China and Germany which is present now spreads. The wage claims in Germany and China are large and in France the strikes are essentially about wanting more benefits. In Australia apart from the private sector wage claims are quite high=police, pilots etc but the govt has fiddled the CPI. So interest rates rise and asset value come under pressure as a generalisation. One island of security in property is Perth residential where losses of 200K on say 700K have happened over the last 4 years and the market is bottoming.

  2. Direction of AUD seems largely dependent on balance of the trade deal and whether certain domestic Aussie official metrics hold above certain technical thresholds.

    That is, it may not go down as much as we think/hope until there is a global shock, as our pollies will pump official figures for political ideology and gain.

    • From a very simplistic trading perspective, it’s very hard for a market to fall if positioned short, this theory is not based on any sort of intelligent reasoning, it’s just the way it tends to be.
      This is why AUSSIE property is ready now for the big falls everyone now is very very bullish at the top and the bears have thrown the towel in.
      Truly be honest how many people on here (MB readers tend to be more aware of the risks and potential for Aussie property to crash than the deluded masses), how many honestly believe what I’m saying, I don’t think many, this is maybe why we didn’t get the sell off in 2013 because everyone was bearish
      I think we have now turned very bullish
      Anyone really think my prediction will come true ????

      • Reluctantly I have come round to the combined thoughts of Chairlady Peachy.

        Still not buying though.

        Fvck ’em.

  3. It was the same thing with gold, everyone in public started talking about gold even in the street and on this site, everyone was so bullish, I got caned by my mates when I said we are now at the top in gold, on this site too, everyone has gone very quiet on gold, there’s definitely players picking the bottom here mid 1400s, but there is doubt now creeping in. On this site, I can’t see anyone really saying this is the dip to go higher.
    Everyone is unsure but if we break into 1300s think a lot on here will start to be unsure but not bearish, not sure at which point the market will get bearish.
    Anyone has it a guess???

    • Agree with your first part bcnich, even I spotted the top based on that market psychology and got out with some small profits intact.

      No idea on the last bit, you could be right about 1300 but I no longer have a strong view.

  4. pretty sure 90% of the australian population has been positioned long property for at least the last 20 years

      • we’ve been waiting 20 years bcinch

        you’ve got the fire and brimstone old testament preacher schtick going, but I don’t think any real mechanical explanation for what will trigger it

        currency debasement and stealth inflation will be the ongoing story

        • Coming, I know I’ll get a lot of resistance towards my view.
          The black swan will be rising home loan interest rates
          No by RBA they’ll be at zero or negative for the next 5 years
          Spreads are going to blow out big time
          Everyone buying now or those have home loan debt, most believe we will be around 2.90/3% for ever or maybe not even considering next several years
          Home loan interest rates are going to start rising out of cycle and we may even get lower rates as RBA cuts first.
          Home loan interest rates are at or close to the bottom
          They are going to rise big time
          Just ask anyone above 55 years old who saw the 1980s
          Rates are going up, sorry to send you the bad news

          • …but the market is dead, remember? It doesn’t function as it should, not will it be allowed to….there is simply too much debt, and the global economy is a zombie.

            Interest rates used to go up because it existed in more of a market and there was a LOT less debt.

            It’s different now (!?).

            Govts and central banks will not allow interest rates to rise – they will print, buy, print, buy, stimulate, and try to run some magical path between massive debt-deflation and hyper-inflation. I can’t see them letting the money pool shrink.

            I think interest rates should be able to rise, if indeed that’s what they “need” to do.

            But we don’t have a real economy anymore, in my opinion…

            My 22222 cents 😛

          • In the scenario of rising mortgage rates I just don’t see the RBA sitting idly by given their unofficial mandate these days is to support housing at all costs.
            Buying RMBS was mooted as one form of QE and the RBA so if bank funding costs start to blow out they will quickly implement this.

          • Any thoughts on US repo market and Corp bond leverage effect on credit ?? Lots chatter by some.

            Catalyst for rates increase ?

          • Carlos
            I really don’t know, I just have a very strong feeling rates will rise, and the more I’m told I’m wrong the more I believe it will happen
            What I’m suggesting is extremely plausible and nearly extremely possible
            It’s certainly not extreme to say home loan rates will be 4% to possibly 5%
            5% and int only reset will tip many in Aust with home loans over the edge
            Do the calculation of increase in payment if rates rise by 2% and turn p and i

        • there is not one single person on this site that thinks interest rates will rise
          Can I ask you all please home loan p and i at bank of Melb is 2.99% someone told me
          All of you that have the opposing view, to me about rates not rising can you pls tell me whet you are all thinking, do you think interest rates will keep going down for the next 5 years ???

          Also do a lot of you think home loan rates will get to 2.5% property then up 10/15% and just sit there at those levels for years to come??
          I’m genuinely curious ????

          I believe home loan rates will rise considerably over next 5 years

          I believe I will be proven correct

          • why do you believe they will rise?

            Yes I think interest rates will stay at or near 0 for the forseeable future, just as they have in Japan for the last 20 years

            Why do you expect our experience to be any different?

          • Interest rates will rise when one of 2 things happen – 1) RBA are unable to buy RMBS (no at all likely) 2) inflation rises significantly and persistently over an extended period of time (unlikely given current set of circumstances). The only way I see this happening is some unexpected event that spikes the oil price (larger more successful attack on Saudi/ – War in ME & Iran blocking strait of Hormuz) and it stays elevated over 6-12 months where it passes through other parts of the CPI. In the absence of this I don’t see it happening in the near future.

          • I think a macrovoices guest or two recently has been saying that interest rates will rise at some stage. I’m pretty sure they will too, no idea when but I think inflation is coming as well as everything goes to shit globally. I’m I holiday so I’m not thinking too hard but in my calculations wrt buying a home at some stage in the next couple of years rising interest rates will definitely play a foundation part. I do think gold medium to long term will be much higher as I think all fiat currencies will be debased against it. They’ll print their effing hearts out as they have no choice