DXY fell hard Friday night as EUR bounced:
Not even that could save the Australian dollar which was taken to the woodshed and butchered against DMs:
EMs were even worse:
CFTC positioning shifted a little more bearish at -27k contracts but there’s plenty of room for downside:
Gold is breaking out:
Oil is breaking down:
Metals dead cat bounced but not copper:
Miners were sliced up:
EM stocks too:
Junk is hanging in there. Good luck with that:
Bonds are bid wildly:
Stocks woke up to reality:
It’s not obvious to me why DXY fell. The US is clearly best placed to weather the building coronavirus storm. It’s GDP is solid and it has a booming housing market. Europe is weak and massively exposed to Chinese demand via exports that are going to suffer badly very shortly. Perhaps it was the end of month trade for DXY. Or maybe, as the virus wreaks havoc, DXY will also fall on more Fed cuts. This would make the unfolding crisis gold’s ultimate moment.
Still, I find it hard to believe. As the virus punctures the market’s euphoria, and risk off mushrooms, I expect DXY to attract the usual end of cycle safe haven bid.
The Australian dollar fell despite the weak DXY because it is the most exposed of all to the virus, both its destruction of Chinese economic activity, and the possiblity of a rising infection rate domestically.
That is why the Australian dollar has been such a dramtic underperformer through January despite markets running massive risk on:
My base case is that it only gets worse from here. I put a 50% chance on China needing to shut down for six months to contain the virus. 20% chance that it succeeds more swiflty. And a 30% chance that it fails and global pandemic destroys the business cycle.
And these probabilities are shifting the wrong way fast.
If China is forced to shut down for six months then the Australian dollar is going to be slaughtered to 50 cents as iron ore, coal and LNG markets collapse:
A whole range of markets are sitting on crucial long term support lines. These included copper, bonds and the Australian dollar. I expect them to break, which opens the way to the GFC low under 60 cents for the AUD.
But if the scenarios play into the negative risk cases then the Australian dollar is on its way to 50 cents with a bullet.
David Llewellyn-Smith is Chief Strategist at the MB fund and MB Super which is overweight international shares that will benefit from a falling Australian dollar.
