Australian dollar stares into the abyss

See the latest Australian dollar analysis here:

Macro Morning

DXY is not finished:

The Australian dollar came off its crisis lows but was still smashed over 24 hours:

Against EM it was mixed:

Gold has further to fall but it is buy the dips now. A $5k target does not seem stupid to me when we come out of this:

Oil bounced but is still going to $10:

Metals followed:

Miners couldn’t rally:

EM stocks did a little:

Junk still points the way for all markets, and it is down:

Bonds all rallied:

Stocks lifted a little too:

Yesterday was some kind of selling crescendo for markets. Not the bottom by a long stretch. First we have to enter the depression and mark down destroyed profits for that. But perhaps the end of the beginning.

The combined long bond/Australian dollar liquidation was the single most extreme monetary environment I have ever encountered. Much worse than the GFC or dot.bomb which I also traded through. For twenty minutes yesterday I was forced to contemplate the end of fiat currency itself.

But that crisis has passed. Central banks are steadily catching up to systemic virus fallout. The ECB is still not doing enough but has dedicated itself to doing so. The BOE came in. The RBA delivered an excellent package of measures. The Fed is still behind but being central bank to the world is not an easy task. Its menu of crisis measures is so full that it will take time to catch up. Last night it issued a range of countries new US dollar swap lines. As expected, they were US-aligned or geopolitically wavering. There were no goodies for the Chinese sphere of influence.

So, I do not think that the panicked bid into DXY is over. Indeed, it looks about half done. We have perhaps passed peak risk parity deleveraging, via Nomura:

This morning, in a detail postmortem of just this move, Nomura’s Charlie McElligott writes that the move shown above in the model “60/40” balanced portfolio may have marked the peak “sell everything” moment, with a record 15.5% drawdown in 18 days, which represents an 8-sigma move, and is the largest on record.

Drilling into this historic move  which saw the conventional “bonds as your hedge” trade going completely wrong-way, especially for risk parity funds in-light of what McElligott notes is the “liquidate financial assets/cash at all costs” environment—and a potential “paradigm shift” of unprecedented and experimental fiscal stimulus in-the-pipe, “we now see the past 18d period of returns for our model “World 60/40” fund -15.5%, greater than a -8 SD move and truly unprecedented dating-back to our model’s 1999 start-date”

Why does this matter? Because “the feedback loop of forced deleveraging/stop-outs in light of the extreme realized volatility mechanically “triggering” and de-risking is best seen by the “remarkable slashing” of gross-exposure within Nomura’s Risk Parity model, where there has been a reduction from the 100th percentile, a reading of 555% on Feb 10th, to this morning’s 240%/0th percentile estimated gross-exposure reading.

But ahead is the ecomomic demolition and record evisceration of profits plus, most importantly, the global bank erasure as it all comes to bear upon the financiers in due course. There is also the unknowable specter of geopolitical fallout as the truly evil CCP tries to shift blame to the US for its virus.

And so I see several new rounds of panic ahead for bonds, stocks and forex that will keep DXY seriously bid. Thankfully, I think we are approaching the point where we can say that authorities are on top of things enough that the system itself can digest it without collapse.

We must add one final point. The virus is still largely a Winter beast. That means Australia will remain shut long after everyone else, with the resulting profits, credit and forex carnage lasting longer as well. Throw in some kind of global China backlash.

In short, the Australian dollar is nowhere near what is shaping as an historic bottom.

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


  1. “.. For twenty minutes yesterday I was forced to contemplate the end of fiat currency itself….”


    There is a big difference between a central bank balance sheet and the balance sheets of the debt peddler shonky private banks.

    I appreciate that the ideology of the privatisation of the public money power likes to deny or ignore the difference (don’t worry folks private banks love you heaps) but it is very real.

    Just a shame that we have another bell ringing failure of the privatisation model before us and again everyone insists now is no time for reform.

    Hopes and prayers?

  2. Love in the time of Corona

    Hope the system’s bloody grateful, yet again. Politicians failed to do their job. Regulators failed to do their job. Voters betrayed their own best interests. Once again the banks et al are bailed out to continue their ruling class whinging about the poor and the ABC and women and Labor and taxes and everything else ad nauseum.

    • For those who support the concept of bailouts – this fiasco lies in your lap.

      Actions – no consequences – moral hazard.

      I have an idea – let’s try a small does of capitalism. I hear it has its merits – creative destruction – actions that have consequences.

      Let it all burn – we’ll be stronger for it. And by let it burn – that includes fiat money. It’s as good as cooked anyway.

        • Ermo, I’m over the bailout culture – sorry. It has been directly responsible for unleashing untold damage on the economy and society. We had a chance to reset during the GFC but the cowardly politicians decide to spray the cash around to the people who caused the crisis. A capitalist system punishes reckless behaviour and incompetence, as it should. The prosperity of all people in society rests on a healthy, growing economy – something that cannot happen when bad companies and rotten systems are kept afloat.

          Capitalism doesn’t preclude compassion or welfare (except in popular folklore) – I’m fine with supporting individuals in need but not corporate welfare. I know that’s highly controversial these days because the intelligentsia are obsessed with keeping people in jobs what ever the cost – even though there would be more jobs around if the economy was actually growing as it should – rather than stewing in its zombie juices. The current system is failing us and instead of the happy capitalism/socialism hybrid we have a system dominated by cronyism and corruption.

          Let it all burn. The short-term pain would be worth it.

          • keynesian Killa

            same goes for the virus….let it run free.
            Its NOT deadly despite the hysteria, and it will be back again next year in a mutated form. Better to get some exposure to it now, but I guess you commies are more interested in making everyone unemployed while the government goes around passing draconian legislation while no-one is watching.
            The shutdown is the REAL virus!

          • boomengineeringMEMBER

            Killa, what you need to ask is who owns he media and set to profit. Never seen the common cold shut down airlines and it has killed more than Corona albeit at a slower rate. Common cold 4.500 deaths per year in US alone.

          • Agree. They’re talking about paying mortgages. Does that mean the taxpayer pays Nathan Birch for 300 of his mortgages if those tenants lose their jobs?

          • Goodness me – I’ve been branded a ‘commie’!

            I feel quite proud. I wonder what drsmithy would have to say about that.

      • Dominic,

        All money is effectively fiat money – even gold backed paper is dependent on trust.

        “Is the gold in the vault?”

        The issue is a monetary system that is a monopoly private / public rent seeker paradise.

        Monetary competition is what is needed.

        1. A large public central bank balance sheet that everyone is permitted to access via a deposit account

        2. A wide range of investment managers

        3. A range of payment system suppliers

        4. A wide range of private money suppliers – balance sheet or crypto.

        5. A wide range of suppliers of foreign money – public and private.

        The public central bank balance is naturally the core but if the management abuse their responsibilities and the trust of the public people are free not to use their accounts.

        Capitalism requires highly competitive monetary systems with a central bank balance sheet at the core as it is within the power of any democratic government to establish a public monetary system and there is a clear public interest in doing so.

        • “Monetary competition is what is needed.”

          Completely agree

          Where is the competition, though, if the state is in sole charge of the legal tender? That’s just a recipe for rorts and corruption – like we need more of it right now. The problem with state-owned monopolies is that you always rely on the integrity of the people in charge and I’m sorry but the integrity of humans cannot be relied upon – ever. Irrespective of political stripe.

          Gold cannot be printed — which is why the elites hate it and tossed it in the trash when the opportunity arose. Gold as money gives power to the citizens. Paper as money gives power to the ruling elites. Both those statements should be obvious. The elites are always biased toward ever greater control over their citizens and the economy.

          The reason crypto has lasted as long as (even though it’s ostensibly un-backed) it has is that it’s a creature of the free market. Genuine competition. People voluntarily choose to own/use it. When BTC crashed from $19,000 that would have shaken out the vast majority of huxters, spivs and speculators – but here we are, more than a year down the line and BTC is still standing – that speaks volumes for the whole concept of the need for competing currencies – the people want it, the people have spoken. The market is a voting system – there is nothing more democratic.

          I think this current monetary system is cactus — the turmoil we’ve seen in markets lately just affirms that for me. What replaces it, who knows, but another attempt at fiat is going to fail and fail quickly IMO.

          • Who said anything about preserving state legal tender laws.

            Let people accept whatever money they like to. If someone doesn’t want to accept your gold nugget that is your problem not theirs.

            Chances are that people will accept liabilities of a central bank…..notes, coins and central bank deposits.

            I thought it would be clear that legal tender laws are directly related to the current monopoly by the state/private bank cartel.

            And it is more than a little rich to claim that cartel is run by the public or in the public interest.

            The RBA is “independent” of democracy and check who sits on its board……business and other insiders.

            Before you consider reform you need to understand the nature of what you are reforming.

            As for crypto well that is on my list along with loads of other competition.

          • Gold cannot be printed — which is why the elites hate it and tossed it in the trash when the opportunity arose. Gold as money gives power to the citizens. Paper as money gives power to the ruling elites.

            Opposites world again !

            Gold puts the control in the hands of the people who have the gold – inevitably a handful of “ruling elites” (because the natural flow of money and wealth is upwards).

            Fiat puts the control in the hands of the people who control the money, which at least has some (albeit small) chance of being the citizens, via democracy.

            You seem to have this crazy idea in your mind that spending money is somehow like voting.

          • smithy, again you prove your ignorance around monetary matters — please avail yourself of some semblance of understanding before engaging in the debate. This is like listening to my 15yr old opine on the state of politics in the United States – endearing, but hopelessly naïve.

    • happy valleyMEMBER

      Thank goodness we have an LNP government (and a PM who is going to burn for us – have I missed that happening?) – the best managers of everything?

      • Yes exactly right, the Libs are the best. Remember after all that John Howard won an election on the promise that interest rates will always be lowest under a Liberal Government, and that was a core promise. Reaping and sowing.

  3. Arthur Schopenhauer

    Why doesn’t the government get an equity position for bailing out banks?

    They can sell the position at the end of the crisis to cover some of the costs, and hold the executives on a tight leash.

    Does anybody know? Are there any ‘real’ conditions on this money?

    • Even StevenMEMBER

      The banks are effectively an arm of government policy. And the government wants the credit taps on full. The government can’t replicate what the banks do so it provides incentives (or pressure) to make them lend. Symbiotic.

      • robert2013MEMBER

        Even a partial nationalisation would yield better dividends than the tax system. What exactly are the banks doing that requires such great skill and imagination?

        • Multi-coloured lanyards, PR campaigns involving small animals and children, full page apology notices in every major newspaper, shrugs and confused blank expressions in Senate estimates. You know… the usual.

      • ErmingtonPlumbingMEMBER

        What do banks do that the RBA couldn’t do.
        I like 007s idea that everyone should be able to have an account with the RBA to deposit money into.
        Id go one step farther and let owner occupier mortgage be taken out with them at their 0.25% rate.
        No technological improvements prevent this.
        These banks aren’t just money for nothing middle men, they are part of an Australian oligarchy that has nothing but contempt for the concept of Democratic accountability.

        • Ermo,

          Think of the Central Bank balance sheet as the core of the monetary system not as a lending institution.

          Everyone should have access to that balance sheet (it needs to be much larger) in the form of an account but the central bank should not get involved in mortgages.

          By all means have a public option for lending but that is not the job of the central bank.

        • Even StevenMEMBER

          I like PFH’s idea of deposits with the RBA. But there should also be some free-market (market demand) mechanism that enables private banks to lend to individuals or business on the basis of merit, using their own credit-worthiness. Governments should not ordinarily be in the business of making loans to individuals (extreme circumstances, like now, excepted).

          • Even Steven,

            Completely agree.

            Banks will be continue to be free to offer unsecured investments (but not call them deposits) and to make loans to whoever they like.

            But if they can’t honour them or demands for return of invested funds they will go out the back door just like any other badly run investment fund.

          • boomengineeringMEMBER

            You guys are treading in dangerous territory, this all could be heading to only one world central bank controlling everything like the conspiracy theory of New World Order.
            Don’t let the central banks bankrupt the banks just to gobble them up.
            We should be fighting to keep the small banks and building societies and credit unions.

          • boom,

            What I propose is the single best thing that could be done to encourage small banks and credit unions.

            A central bank deposit account would pay no interest.

            If people wish to save completely risk free they can put some savings in their Central Bank account but if they want some return then they would need to invest and take some risk and that is where the small banks and credit unions can win customers.

            Just like notes and coins, central bank liabilities in the form of a central bank account would pay no interest.

            Currently the large banks are crunching the smaller banks because bigger is always better in a cartel controlled industry.

            If you want to support small banks and a wide range of other investment options then it is critical that the general public are given the right to operate an account at the Central Bank.

            It simply does not make any sense to say you use central bank liabilities in the form of notes and coins but not use them in the form of an account at the central bank.

  4. Where’s gold going from here in AUD terms – Is there any expected decent short term drop or is it immaterial and so a buy with both hands now if u want it?

    • To answer that you need to know:
      where is USD-denominated gold going?
      where is AUD/USD going?
      If you know the answers to those, then you’re all set!
      (AUD gold = USD gold divided by AUD/USD e.g. right now AUD gold = 1,469/0.57=2,577

    • I’m holding a lot of USD for now, and will consider buying gold later, when the USD has turned and the AUD has tanked further.

      I could be wrong about the above, but that’s the general plan – but I am watching things closely.

  5. robert2013MEMBER

    With swings this size it’s bloody scary levering into short AUD positions. How to do it safely? I’m thinking of some long dated options on USD ETFs. They won’t be cheap though. Maybe short the banks instead?

  6. Anecdata – my brother lost his job in western sydney sports club after more than 20 years. place was crashing before beerflu. we need UBI not government paying NRL players and billions to Qantas.

  7. I’m already hearing of several companies who have put an immediate freeze on hires. A young couple both working the Plaguelord’s dream job scenario of 2xCasual have both got zero work as of Monday this week, one was told “don’t call”. The kids before school care and daycare are at about 20% numbers. Gymnastics and swimming lessons might as well be closed down there are so few kids. Where they can, people in Perth are going into voluntary lockdown, and businesses are struggling or outright distressed now.

    We’re not even into the thick of it and people are getting hit hard. If you take hit from Rainbowberg’s bong and say Martin North’s mortgage stress numbers are twice reality (i.e. 16% of households in mortgage stress) we’re still utterly boned.

    We should let banks fail and bail out households. We should be targeting individual with payments RIGHT NOW if they’re without work due to the virus. Might as well hone it when the numbers are small.

    People just don’t seem to get it.

    Here is a blurb I put up on FB under an SBS news post about the triumphant policy announcement of the Plaguelord:

    What value do you put on a human life, Brush? The RBA has just cut rates to 0.25% and launched QE to try and stop bank funding costs rising so far, so fast, that it results in a collapse of our banking industry as a whole.
    So, where does this QE money come from? We print it. Doesn’t matter if it is issuing bonds, created on balance sheets or literally printed and handed to people in envelopes.

    The Government can chose to do what it is there for and look after its people rather than its donors and vested interests. Sounds costly, doesn’t it? Well, let us look at the GFC as a case study:

    “The Special Inspector General of the TARP put the gross government outlay at $4.6 trillion, with over $16 trillion in guarantees. Bloomberg concluded the rescue expenditure was $12.8 trillion. Fortune (which saluted the investment as hugely profitable for America in the end) put the number at $14 trillion. The Levy Institute at Bard College did probably the most extensive study, and put the number at $29 trillion.”

    In 2008, US GDP was ~$15 trillion dollars. Best case they spent nearly 30% of GDP bailing out their banks, while shafting households. For that spend, they could have given every man, woman and child in the US $15,000 dollars to look after themselves. If the true spend was closer to $29 trillion…. yeah, you can see where this is going.

    While stabilising the banking system is important, I’d argue that you and your families quality of life, and the lives of those most at risk from Covid-19, is vastly more important, thus the government should spend on you and yours, not banks and theirs.

    Clearly the GFC would have had a remarkably different outcome for the American people if helicopter money had been employed, and if it had been done worldwide in preference to QE, maybe this Viral Financial Crisis wouldn’t be a thing.

  8. The poo in the last 24 hours was like it was paper in a tornado. Went to bed thinking it was going to burst into the 60’s again.From a low of 55.20 to a high of 59.65……….

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