Lunatic RBA prevents Australian dollar free fall

See the latest Australian dollar analysis here:

Macro Afternoon

DXY remains the only place to be as EUR sinks:

The Australian dollar hung on to critical support again:

EMs were also weak:

Gold was firm:

Oil is getting trashed depite Libya and OPEC taking 1.5mb/d off the market:

Metals are still falling:

Big miners too:

EM stocks were OK:

Junk is serene. This can’t last if oil keeps falling:

Bonds rallied:

As did stocks:

Westpac has the data wrap:

Event Wrap

No major data to report.

FOMC member Bowman said the economic backdrop looks “very favorable”, the economy should continue to grow at a moderate pace, with low unemployment, and an expected rise in inflation to its 2% target – all reflecting the key messages of the most recent FOMC policy statement. There was no indication that coronavirus had caused any material change in the economic outlook and policy stance. Daly said a mindset change was required, where inflation is a “bit above the target”, rather than below.

Updated coronavirus statistics show confirmed cases total 40,655 worldwide (40,199 in China), of which 910 have died (908 in China) and 3669 have recovered.

Event Outlook

Australia: Another robust gain for housing finance is expected in December, circa 1.6%. Demand for loans from owner occupiers has been driving growth in recent months and this is expected to continue in December. Meanwhile, the NAB business survey is likely to report another weak reading for conditions and confidence in January.

UK: The monthly GDP data points to a contraction in Q4, -0.1%.

US: Fed Chair Powell’s testimony will be the main event, with a particular focus on any discussion of the risks. Bullard, Quarles, Kashkari and Daly are also due to speak. NFIB small business optimism and JOLTS data are due too.

The narrative is intact. The US is the best place to hide from coronavirus.

Sadly for us, the RBA didn’t cut, or the Australian dollar would now be in free fall. Westpac examines some spread scenarios while we wait for Dr Phil to catch up:

Last week, in his Governor’s Statement, speech and the SoMP, Phillip Lowe could not have sent a clearer message to markets around the near term policy track. He thinks the RBA has provided enough policy accommodation for now and is expecting an extended period of unchanged policy while they assess the impacts of that accommodation on the real economy. That view is very different to Westpac’s own. The RBA surprised us by retaining a growth forecast of 2.75% (around trend) for 2020, despite the weaker momentum apparent in the Q3 national accounts and developing questions around the global economy. It is also somewhat brave, given a range of leading indicators around the labour market, to assume that the recent falls in the unemployment rate will be sustained. Westpac’s forecast is for the unemployment rate to drift upwards over the first half of 2020. The uncertainty around the coronavirus poses substantial risks at least over the first quarter both globally and domestically, implying a realistic downward revision to growth forecasts, both globally and domestically. Westpac continues to expect that a combination of a more moderate growth outlook and an unexpected (by the RBA) deterioration in the labour market will require a further policy response. Currently we have April pencilled in for the next cut (followed by a further move in August) but recognise that the Governor may need more time to be convinced that further action will be required. As such, it is worthwhile exploring where markets could move in the first half of the year under different RBA scenarios.

The AU bond curve has flattened in recent weeks during both bullish and bearish episodes. The bearish episodes, such as last week, have been largely a result of a re-pricing of RBA expectations, while the bull flattening episodes have been driving by long end buying on safe haven flows (chart at left). So will this trend stop being the case? We have held a curve flattening preference for some time and do not have a tactical or strategic desire to shift significantly from that view. The same major themes that have driven the curve flatter in recent years are still in play. Lower domestic cash rates and a global liquidity glut that is underwriting a search for yield remain in play. That being said Australia’s yield advantage relative to other AAA sovereigns (chart at right) is the smallest it has ever been. So that should slow the pace of curve flattening from current levels. Other headwinds are likely to come from any renewed market confidence that the RBA will shift policy in similar way to our own forecast timing. Even so, those sort of steepening impulses will continue to be short-lived.

I remain confident that the RBA’s terrible forecasting ability will prevail in short order and it will be forced to cut again as the coronavirus shock arrives in earnest.

The Australian dollar has not bottomed.

David Llewellyn-Smith

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Comments

  1. Risk assets are saying: this will all be over soon.

    Alternatively: the Fed will print so much money we’d best stay limit long or risk under-performance.

    We are at that point where investors resolutely believe the Fed will do ‘all it takes’ to maintain risk assets and bonds at current levels. Amazing times – and yet no one thinks anything of it. However, the Fed can print money but they cannot print profits and they cannot create jobs. When the rubber meets the road, how will this end …?

    • I think next is companies with no profits doing a return of capital, via money they have previously borrowed, to maintain or increase their div.

      • The issue with that is that they need to service their debt-bergs. They have been borrowing to pay dividends and do buybacks for several years now. When the day arrives that they can’t service their debt it’s game over. I’ll have to search for the link but something like 40% of all small cap companies in the US have a debt service coverage ratio of less than 1, as we speak i.e. they have negative cashflow. The Top 10 companies in the S&P500 produce about 80 or 90% of free cash flow for the entire index (I’ll post the link when I find it).

  2. EUR/JPY
    EUR/GBP
    EUR/USD all lower
    Looks like an exit from Europe

    The AUDUSD market is a little short again, traders see AUD as just a proxy to short China

    AUDUSD looks like it’ll break lower into a new range 65/6650 from 6650/6800

    You’ll have to be careful, there will be very aggressive short squeezes as we go lower over time

  3. “..Sadly for us, the RBA didn’t cut, or the Australian dollar would now be in free fall…”

    Free fall?

    The thing that really makes a difference for the AUD are our terms of trade and trade balance.

    If you want to see the AUD free fall you need a collapse in iron ore, coal and foreign student income.

    As we have seen over the last 7 years interest rate cuts by the RBA are a pea shooter compared to the fire power of our trading partner Central Banks. Their desire to export capital to chumps like Australia far exceeds our attempts to deter it with interest rate cuts. Keep in mind that Canberra are offering FTAs to anyone with a pulse. All that FIRB approved capital flowing in buying up assets undermines whatever the RBA cuts might have achieved.

    Once upon a time it was believed that if our RBA target rate was not at least 2% higher than that of the Fed the AUD would collapse. That seems sooo long ago now.

    • All they need to do is push back on foreign investment a little, and thus reduce the ability of freshly printed foreign currency finding its way to Aussie assets.
      AUD goes lower

      • TF1

        Yep !

        This idea that the RBA cutting rates is some cure for a high AUD doesn’t make any sense when it is clear that every arm of public policy is directed (in the form of FTAs) to attracting as much unproductive capital as possible. All of that unproductive capital is pushing up the AUD.

        And that is on top of terms of trade and a trade surplus that is directing upward pressure on the AUD.

        Assuming that we don’t want to lose trade income (only a nut would hope for that) the critical issue remains capital flows.

        The idea that our RBA rates is any match for the predatory desire of our trade rivals to export capital to Australia is bonkers especially when it is clear that the Australian government is seeking to attract as much unproductive capital as possible.

        It is baffling why people are arguing for interest rate cuts / QE when the only reason for doing so is to watch asset prices froth and float to the clouds.

        If we want a lower AUD and a trade surplus we need to do what our trade rivals do.

        Actively seek to encourage the export of capital.

        Just like our trade rivals do.

        • It’s not the 1970s anymore. International trade or even foreign investment very little direct influence on currency prices these days. Nowadays, the overwhelming majority of the volume of trades on the forex market are speculative. The behaviour of the RBA certainly influences this speculative behaviour to an extent. But I don’t agree that RBA monetary policy alone has any significant control over the price of the AUD. However, that’s been the delusional thinking by the head lunatic.

          • Les,

            Yes those speculative flows are not helpful and should be hosed down with a Tobin style transaction tax but they are bets that are placed having regard to movements in terms of trade and exports and related capital flows. They amplify and increase volatility. A small transaction tax would kill off much of the high frequency poker bets while doing little to inhibit capital movements related to trade and productive investment.

            Unfortunately even modest measures to reduce the amount of speculation in currency markets are resisted because of the obsession with “free markets” regardless of whether they are productive or dysfunctional.

          • Today’s largely unrestricted flow of capital is a root cause of financial and productive imbalances.
            Massive and persistent current account deficits no longer effect currencies as the surplus nations simply buy up the assets of the deficit country.
            Discouraging such flows ( taxes on foreigners ) means deficit currencies depreciated to a level for domestic production to replace imports.

            I would suggest, the politics ( to benefit the multinationals ) rolls out these FTAs which often are not only about trade but more to do with taxes on foreign investment and the removal of it.

        • Phf
          With QE in United States FED bought long end bonds 10 and 30 year which drove down long term fixed interest rates
          US mortgages and 10 and year fixed rates
          RBA can’t control variable short term rates if funding costs rise.
          Can someone tell me how QE would lower home loan rates
          This is probably a Q for Dom, I’m really curious
          Think it’ll just blow a bubble in ASX

          I said to A2 it was actually this time 12 months ago, ASX would go to 7,000 in 2020 and then get sold off to 6,000 again, wasn’t sure timing, maybe 6,500 not sure but a correction
          I said I think we will see 10,000 in ASX this cycle, I think we will.
          IF AUD gets hammered which I think we will see 50c some time and those imbeciles at the RBA start QE, think they’ll just blow another bubble

          They should have implemented MP and not lowered interest rates ad much and QE may not have been needed
          I think QE will be used to pump liquidity in the banks blowing a bubble in bank share and ASX.
          let’s see

          • Jumping jack flash

            “Can someone tell me how QE would lower home loan rates”

            As with manipulation of the cash rate there is no hard link. They just hand fresh money to the banks and then say “here, look at all this free money we handed to you, now surely that means you can shave a few points off your retail mortgage rates because you’re so capitalised now?”

            As with everything in this New Economy, where the goat is the gardener and the cart is firmly attached to the front of the horse, its mainly just voodoo and wishful thinking.

    • “If you want to see the AUD free fall you need a collapse in iron ore, coal and foreign student income.”

      I think there’s a virus that does that…

  4. RBA interest rate cut has little effect on AUD, if yes, it is very short -lived. If lower interest will devalue your currency , Japanese Yen would go down all the way from 1990s when it cut its interest to zero . If increase currency will push up your currency, Argentina peso would have been strengthen in the past few years when it raise interest rate beyond 80%. AUD is the pure reflection of relative strength of Australian economy compared to other countries. If RBA hold its fire 5 years ago, AUD would still be down to this level.

    BTW, When AUD crashed from 1.1 to now 0.67 , almost 40% down from its peak, has it really made Australia economy stronger than other countries?

    • I think your view is missing 50% of the currency market equation. Sure, 50% is looking for speculative gain and possibly safe-haven status (as per your examples). But the other 50% of the equation is the pursuit of income (i.e. interest on your capital). This is also a powerful force driving FX values and interest rates are at the core of it. The reason the Aussie (AUD/USD) went to above US$1.10 a couple of years ago was interest rates, interest rates, interest rates.

      • More to do with mining boom…it hit 1.1 in 2012, yet you can see much higher interest rate in Australia in early of 2000 with much lower AUD at 50 cents.

      • seafeet. Sorry. I disagree. At the earlier time you mention US interest rates were sky high cf Australia. Hence the low AUD. It’s always about what interest rate comparisons show

        • From 1 Jan 2017 to Dec 2017 , there is no interest rate move in Australia while US hikes rates 2-3 times, if interest rates comparison all matters, AUD dollar should have gone lower…but it goes up.

  5. Jumping jack flash

    With all the positive spin coming from the US at the moment that would at least account for something.
    If the hype is to be believed then the US is going gangbusters and that means everything else adjusts relative to that.

    I’m sure there is a fair amount of manipulation happening over there, too.