Australian dollar trapdoor opens

See the latest Australian dollar analysis here:

Macro Afternoon

DXY is the unstoppable freight train of global markets:

The Australian dollar trapdoor opened:

Gold is sending a nasty signal about the virus:

Oil is deluded:

Metals have a better notion:

Miners will be crushed when iron ore breaks:

EM stocks gave in:

Junk woke in fright:

Bonds boomed:

Stocks hiccuped:

Westpac has the data wrap:

Event Wrap

The Philadelphia Fed business survey rose from 17.0 to 36.7 (vs 11.0 expected). Producer sentiment has been boosted by the US trade deals and reduced Brexit uncertainty.

Fed VC Clarida said in a CNBC interview that it’s a “good picture” for the economy, with strong economic fundamentals and accommodative monetary policy. He noted the strength in the regional surveys, including last night’s Phil. Fed, and said a rebound in business investment is possible. The Fed is closely monitoring the coronavirus which is expected to have a noticeable impact on the Chinese economy, but it’s too soon to say what it will mean for the US.

The minutes of the 23 Jan ECB meeting were less upbeat than the official statement in January, emphasising caution on the growth outlook, and retaining the option of adding additional stimulus.

Event Outlook

RBNZ Governor Orr speaks at a lunch in Christchurch about last week’s Monetary Policy Statement.

Japan’s January CPI is due, the market is expecting inflation to remain weak at 0.7%yr.

For the Euro Area, January headline CPI inflation is expected to stay at 1.4%yr, well below target.

PMIs will be released for Japan, the Euro Area, the UK and the US. This will be the first evidence of how COVID-19 has impacted manufacturing and services since the Lunar New Year holidays. The outbreak is likely to affect Asia’s economy immediately but will take time to pass to Europe and the US.

The virus bubble is in a bit of trouble. Cases are creeping towards out of control in Korea, Iran, Japan, and probably Vietnam. Note that they are all Chinese economic satellites. The US dollar is the safe haven of choice, as expected, via Bloomie:

The spread of the coronavirus has suddenly sparked foreign-exchange traders into action.

…What’s going on in currency markets is “mad, bad and very ugly,” said London-based Kit Juckes, a strategist at Societe Generale SA. “It looks like huge capitulation by almost anyone who isn’t a dollar bull.”

The greenback is outperforming virtually everything so far this year, confounding expectations that it would weaken following a trade deal between Washington and Beijing. The U.S. dollar index — a widely-watched gauge of the currency versus its major peers — has surged this week toward 100, which hasn’t been breached in nearly three years.

…“The 100 level is a big deal,” said Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank Ltd. “A number of buy signals will kick into play, it will set the alarm bells off.”

There’s more good news for dollar bulls. The index’s moving averages are close to forming a so-called golden cross, when its 50-day measure rises above its 200-day equivalent. It would be the first time since 2018 and a sign to some traders of more gains to come. The pattern formed 13 times since the turn of the century, heralding average gains of about 2.5% in 40 days.

And why not? US data is booming as manufacturing starts to trail housing higher:

Manufacturing firms reported an improvement in regional manufacturing activity, according to results from the February Manufacturing Business Outlook Survey. The survey’s current indicators for general activity, new orders, and shipments increased this month, suggesting more widespread growth. The firms reported expansion in employment, although at a moderated pace from January. The survey’s broad future indexes also showed improvement this month, indicating that growth is expected to continue over the next six months.

The diffusion index for current general activity rose nearly 20 points this month to 36.7, its highest reading since February 2017 … The firms reported overall increases in manufacturing employment this month, but the current employment index decreased 10 points to 9.8. Just 18 percent of the firms reported higher employment, compared with 28 percent last month. The average workweek index, however, increased 5 points.

Driving economic surprise to two year highs:

This, while the entire Chinese economic sphere slumps into pandemic. China is now panic cutting interest rates. Europe is about to get slammed via the export channel. And the other nations are all coming down with the virus. CNY, EUR, north Asian currencies are all on a hiding to nothing.

The US will get disrupted too in due course but not DXY. As risk off rises it will go parabolic.

The Australian dollar trapdoor has opened.

David Llewellyn-Smith

Comments

  1. GG
    looks like your gold yen correlation has broken
    Looks like markets don’t feel JPY is a save haven
    They seem quite big sell offs in yen in a risk off sentiment
    What do you think is going on ?

    • It’s a major change, for sure. I hope David is wrong about the virus being on the loose in Tokyo. But very happy with AUD gold.

      • GG
        That’s a very telling move in USDJPY.
        Money is leaving Japan big time, I agree with you I can’t remember when USD moved that much higher in risk off type environment
        Also I’d say market will be long JPY expecting USDYEN to fall
        We could be in for a big fall in JPY with this increase in dollar

        GG do you live in Japan ??

        • Normally the Yen rallies because speculators are unwinding carry trades, but risk assets are largely bid still, so there clearly isn’t much unwinding going on. Perhaps that’s still to come — or there is a new regime in play.

          If the latter, the Yen could be in a world of trouble as the structural short has kept it propped up for an awful long time. Could we be seeing the groundwork laid for hyperinflation over there (finally)?

          US Dollar for the short-term but medium has got to be gold. The Fed is going to be providing a lot of extra dollars to the market soon. A fckload.

          • You’ve answered me a few times. I’ve never understood yen, I sat next to USDJPY trader for years and never understood the moves
            But what ever is going on looks ominous, there is some exit going on in yen
            USDJPY could go much higher from here

          • Okay…but…..”Virology results indicate that some Asian populations may potentially be more susceptible to 2019-nCoV than other races [6, 10, 11], which is consistent with the observation that disproportionally higher number of Asian populations is infected, even in an international metropolitan like Shanghai, although more evidence is needed to draw such conclusion. ”

            So asian pops MAY be more susceptible to the virus, but that isn’t proven, just a possibility (my choice of words). Again, maybe I missed something in that article, but didn’t see any mention of it resulting in an increase in mortality due to this.

            Just think your comment is a big leap.

          • ContrarianMEMBER

            Hey Dennis that is one of dozens of medical reports i advise you read the lancet and other medical reports.

    • Derivative exposure is at multiples of the GFC – there is a massive rout coming and Japan went all in on the LDO of corporate America for their savings, super and pension plans – they are in serious trouble.
      It was easy money with decent returns at minimal risk – except “The Big Short” wasn’t in Japanese and they missed the memo about US ratings agencies being completely and utterly corrupt.

      Germany imploding with their total mis-reading of the electric vehicle market (Japan also – who have decided that Hydrogen is the way to go, tell that to the people who bought BETA video recorders).

      China now has 400 electric car manufacturers, is the worlds largest car market and along with Europe just slammed the door shut on internal combustion engine cars.

      Global correction coming – nothing can stop it already under way – mainstream news will be on the case in a month or so…… as always.

    • ContrarianMEMBER

      4k USD over the next 24 months if this isn’t stymied soon, probably the best trade of 2020 so much upside potential so little downside risk.

      • Yep. Such a low risk high reward trade…

        Inflation spikes. Gold higher.
        Print money cut rates to negative. Gold higher.
        Problems constrained to China and AUD lower. Gold higher.
        Local economy tanks. Gold higher.

        And local miners carrying no/low debt. Just get in…

    • Actually, no doc. I assume a typo but if not I can’t see what logic you’re employing there. If risk escalates we’ll see gold testing its 2011 (all time) highs in the next few months.

      The Fed will print the Dollar to buggery but you can’t print gold.

    • it wasn’t a typo, gold performs poorly during the starts of recessions
      in just short period around Lehman collapse in 2008 it fell almost 30% and recovered only as the worst passed and traders gained confidence again

      with virus risk the intrinsically worthless nature of gold would cause price to collapse with recovery happening only after the worst passes away
      gold is not hedge against a catastrophe, it’s merely a speculative vehicle now

      • Your right. It falls because its the only thing you can sell to cover your losses, pay your premiums, margin calls etc…
        Its a shame because a lot of long term investors can get sucked down and out while still knowing that long term it will pick up

      • Charlie TangoMEMBER

        You seem to be conflating material needs, i.e. food with a store of wealth & the ability to use that to purchase material needs.

        • small gold bars and silver are useful enough, 4 or 5 oz of silver for the weeks shopping.
          its the big heavy stuff that’s hard to unload

    • Yep, the impact of the supply chains is only beginning to be felt now – and that’s the JIT air-freighted stuff. Most supplies would have been up-to-date leading into Chinese New Year so it’s the subsequent orders that will be impacted – and many of those have a lead time of several months. So, many manufacturers and retailers will only be finding themselves with a supply gap in April/May/June this year. There are still ships on the water – dispatched ahead of CNY – and yet to arrive at their international destination.

    • Tripster
      That’s probably a sign that there is a real global crisis brewing
      Noone cares about normal they are hiding where they can
      Gold & USD
      This is not normal market conditions
      I believe the next GFC 2.0 is not far away

  2. It really feels like there is a serious external crisis brewing
    Sort of feels like a couple of months away
    Maybe into April around ?
    Any thoughts guys, APRIL’s feeling a little eerie

    Does anyone else feel that ??

    Really feels like we are only months away from the global economy crashing ?

    • The sunspots have arrived. But I agree, it feels like the verge of a global liquidity crisis. But it’s felt that way since 2015 to me.

    • Well, yeah. As markets to realise coronavirus won’t be over by mid March, financial markets will wobble… then people will realise the real economy is actually tanking and it will be on for young and old.

      • The Traveling Wilbur

        Markets common-sense lens free market principles fail to connect rational agent pre conceptions *chortle*.

        Sorry, was just playing ”What would skippy say?” there for a second.
        Took me three minutes to remember ”rational agent” btw. 🥴

    • If there’s any truth to the rumour that Beijing is on the verge of a Wuhan-style lockdown, it’s game over.

    • Yeah i think this is it. The end of the whole stinking edifice. I thought they might have kept it going for another couple of years tops but a China virus will do us in. So darkly funny considering the region the plague came from. I think the economic and social impacts will be on a similar scale. Oh well mother nature needed some respite from her most rapacious of children. I’m starting to consider the questions of how many people will I know not survive this thing and will I? Incentive to try and enjoy life as much as possible.

  3. Can I ask an honest Q
    Do you really believe Aust property will be higher than now this time next year ?

      • It hinges on unemployment. Demand has been brought forward by recent cuts, and supply could spike if unemployment drifts higher.

        They might cut and bail out banks, but that won’t necessarily save the household budgets.

        The bull trap scenario is alive and well.

        • +1, I bought because I feel the risk of bank bail in / out is high and during that period access to your money might be difficult. Rather owe the banks a bit than have them owe me a lot. 😀

    • There are those that argue many Chinese will be rushing into the Strayan property market but that strikes me as jumping out of the frying pan and into the fire given the strong economic links. Better to got to Europe or North America with your money I’d say, but who knows how people are rationalising things these days.

      • Not if they just have cash to get rid of in a hurry, and out of china
        I reckon our fire might be more comfy than their frying pan.
        We only need a couple of hundred thousand (of 1.4 Bil) to move and up she goes. Govy might make it more appealing for them too to save themselves, great econ managers they are

        • Yep, definitely a possibility – assuming they can get their money out at all.

          That said, no wonder Bitcoin and the cryptos have a bid right now – it’s an excellent way for money to cross borders undetected.

  4. So what are the top 3 gold/silver equity exposures that people like? Preferably low/no debt, low cash costs and an unhedged book…

  5. David Llewellyn-Smith will be creaming his derps at the AUD/USD charts today! Finally broken through!

    Looks like the next level of hard support is at the 0.60 mark.. bombs away!