Australian dollar to fall through looming depression

See the latest Australian dollar analysis here:

Macro Afternoon

DXY took a breather after nine days straight up:

The Australian dollar bounced on the crosses:

Gold was up:

Oil too:

And dirt:

Not miners:

EM stocks did better:

Junk was mixed:

Bonds were bid again:

As stocks hit new closing lows:

Central banks have caught up for now. Fed swap lines are doing their job. Via Standard Chartered:

The ECB has announced the results of its USD liquidity tender. $114bn was taken up by financial institutions. The ECB and other major central banks announced that they will be conducting daily USD tenders next week. The intention is to convince market participants that USD funding will be there in any size required.

The ECB’s hope is that if it demonstrates that the liquidity is there in size, the private sector may start re-intermediating. The tenders were at low rates considering market conditions, and offered at unlimited size, but the strategy is similar to the Fed’s – ask no questions, write the check.

The effect on the EUR-USD basis was immediately visible in a sharp narrowing in recent days.

The upshot is that with US dollars now available at US-aligned central bank discount windows  – not Chinese ones – there is less need for banks, funds and hedgies to liquidate everything in sight to get their hands on greenbacks.

So, bond yields have also stabilised and risk assets in general have bounced alittle, though not stocks.

In Australia’s case, the new RBA swap line, combined with QE, has done a great job in restoring the bond bid. The curve is still hilariously steep but it’s coming in fast. I note as well that CFTC market positioning for the Australian dollar showed a surprising, large puke in shorts last week:

I suspect we’re seeing the unwind of some conbined global hedgie trade that coupled long Aussie bonds with an AUD short that got liquidated. With the swap line in place, the pressure to sell AUD assets has eased.

So, this leg of the Australian dollar crash is perhaps over. Though I am not of the view that we are anywhere near the bottom. Ahead lies a global depression and globalisation unwind that is likely to pressure the currency for years to come:

I still think that we will see post-float lows somewhere in the low-40s before it is all over.

David Llewellyn-Smith
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  1. Could see a bounce this week though if the markets think the new Smoco package is more than just smoco and mirrors…?

    • happy valleyMEMBER

      It won’t take them long to do that when they see the $105bn numberwang fudge to include the RBA and AOFM funding packages announced last week and used to get Josh’s and his overall totally underwhelming $189bn total package to date ie $84bn of true direct money support for needy Strayans?

      That true $84bn won’t go far and I am wondering whether the ATO and the other “cash and government guarantee loan dispensers” will be able to process the payments before people go broke, starve and/or die from the virus. Has anybody asked motor mouth ScoMo that question?

      • As this is a fluid situation, what does the 84bn of direct support entail at the moment?

  2. Collapsing AUD?

    That might have something to do with the fears about world economic growth and trade BUT it might also be influenced by reckless low interest rate / weak AUD policy by the RBA.

    Considering we don’t actually produce much that anyone is going to want any time soon (education, commodities, a house in plague town etc) why do want a weak AUD.

    Demanding a weak AUD is like asking Santa to come take away your presents and leave you a bucket of prawn heads.

    • The chronic CAD of Straya means that AUD can only move in one direction – and that direction is not up. This will happen regardless of whether one demands it or not, and yes, Strayans will become poorer in the process.

      Having said that, look at the bright side of having a Zimbabwe-like AUD. Straya will once again become globally competitive – by undercutting the other competitors on prices!!

      In a longer term, you would want to value-add. But, given the state of the total wreckage known as Straya, you will have to start from competing on prices.

      • We are currently running a current account surplus

        It’s just highly dependent on dirt.

        Most countries with large trade surpluses based on commodities set up large sovereign wealth funds to export the resulting capital to productive investments so their dirty riches do not hollow out every other form of industry.

        • Yes, yes and yes. AUD shot up due to the dirt-based CAS in the early part of the 21st century. But “currently” is taking a snapshot.

          Longer term, Straya ran chronic CAD for many decades. A decade or two of running CAS cannot possibly offset the long-term trend. Given that “we don’t actually produce much that anyone is going to want any time soon”, as you correctly pointed out, Straya’s CAD will worsen, not improve, longer term. That is, if Straya stays the course. The only way to reverse the course is to become globally competitive. The first step is to compete on prices (Straya lacks the infrastructure to value add and it takes time to build one).

      • I dunno, a wrecked currency hasn’t done Zimbabwe many favours. Their economy is still up sh!t creek last time I looked and I’m not sure how many of the white farmers they begged to come back actually did. Once bitten, twice shy, and all that.

    • DingwallMEMBER

      Something needs to snap at some point ……. we need to start producing things that contribute to a healthy, diversified economy. If we are forced into it all the better ………………as given time and our usual lack of any strategic thought we will revert to education, commodities, and those renovators with views in deserted towns…………. the first ones out of the post-virus world will be the usual ones we can’t seem to get rid of…. RE agents.

      • Trust me, you’ve got this wrong – we need to encourage more parasites like Harry. Build and import people – all the smart countries are doing it. 😉

  3. They will have to shut the ASX down when the hospitals overload not only because the drops will be precipitous but simply out of respect for our dead. Don’t take any positions longer that a day.

    I hope the families of all those who are about to die in the health front lines are looked after like those of our soldiers who die in battle. From what my soldier brother tells me this will be worse than most wars for them.

    • If the ASX is of any indication, Straya will do very well – hardly anybody will die due to the coronavirus. I mean, look at IVC.

    • Just like the soldiers that die in battle defending “their” country, the reward is likely to be the renewed flooding of “their” country with assorted cultural misfit foreigners. But them misfits will need to serve 14 days in quarantine first.

      Oh, and maybe in addition to RSLs, we could have RML (returned medicos league), where we can have some more pokies places. Should be sweet.

      • Make that 30 days, I have had this since 10th March and it still gives me a reminder every now and then. At least my heart is no longer trying to break speed records.

        • Well ok – 30 days, if it makes you feel better.

          “Ave Imperator, morituri te salutant”

  4. DingwallMEMBER

    Well open seemed a bit stuttery delayed? on FX street………………. AUD down 1% in I guess one of many gyrations in all directions…

      • DingwallMEMBER

        It did ….then bounced nearly 1/2c …. then reversed again …………all in the space of 35 mins

        • I try not to look at it at all for the first hour after the Monday open, it just bounces around like a turd on a trampoline, just have to wait until it settles down and see where it’s at.