Donald Trump might crash the Australian dollar to zero

See the latest Australian dollar analysis here:

Australian dollar stares into the abyss

DXY is an untouchable rocket ship. Judging by past episodes of US dollar shortage this has weeks to run:

The Australian dollar is now in outright free fall versus DMs:

Though it had a better day versus EMs:

Gold is still liquidating:

Oil is literally going to zero:

Base metals are next:

Miners are now iron ore pure plays. Good luck with that:

EM stocks are about halfway down:

Junk is further along the path:

DM bonds all sold again:

Stocks were slaughtered again and took out 2018 lows:

It is pure and simple sell everything. So, let me explain as best I can on what I think is happening.

Global markets are siezed by an immesne margin call around the US dollar. RaboBank explains this:

Does anybody seriously think this [fiscal spending] will ever be repaid in taxes by an economy that will emerge with higher levels of debt, and the same structural low productivity and inflation and growth? No. Given this is “war”, the BOE and the Fed, etc., will be called in for fiscal support instead – as a slew of talking heads on Bloomberg TV–none of whom had ever previously supported MMT before as far as I am aware–all came out to demand yesterday morning.

After all, it isn’t like the Fed isn’t already offering trillions to the markets via an ever-expanding alphabetti spaghetti of channels. One can hardly keep up with the scale and breadth of them. The minutiae are covered superbly in the US by Philip Marey, who rightly saw yesterday’s expansion, or rather retreat, back to the kind of Fed primary dealer support available in 2008; and in the Eurozone by Elwin de Groot and Bas Van Geffen, who have been writing on TLRTOs and their ilk. Yet at root, each mechanism is merely a pipeline from the central bank and its fiat money power to various interest groups who need cash. For example, the new Primary Dealer Credit Facility lets the Fed lend USD against stocks, whose value–in a world where markets go and down 10% a day–will be determined by the Bank of New York Mellon. If we are already going that route, why not the Yang/UBI one too – especially if it is the only thing that is actually going to work?

Meanwhile, ticking away in the background is the USD64trn question of the most important pipeline. Not oil, with which we are choked, and where some are talking about the need for negative prices to stop the stuff flowing(!) Rather, Fed swap lines.

As we have repeated endlessly, the USD is THE global currency and Eurodollar is absolutely vital to understand. When you have an economic and financial crisis, everybody wants to tap local central bank liquidity; but when you have a global economic and financial crisis, everybody wants to tap US central bank liquidity. We live in a world in which emerging markets, now a huge slice of the economy, are addicted to USD borrowing, and have more outstanding USD debt than ever. They are desperate for dollars, and won’t be earning many from trade as global demand collapses.

The Fed has already opened swap lines with the major western central banks and Japan to ensure that they can get access to USD, which they can then use to swap with local currency, so easing USD funding pressures there. Yet the Fed has NOT offered this swap facility to emerging markets. Pressure is building on it to do so in order to prevent a USD liquidity squeeze hitting them on top of real economy damage from the virus: but can it and will it?

Consider that a Fed swap line is a precious political commodity. It says that your currency is, when needed, as good as USD: it has value in an emergency like this. Yes, the Fed would generate a lot of good will by offering swap lines to EM, and it would cement the USD’s global role even further. Yet money is power, and some critics allege the US has long manipulated the USD global liquidity cycle to first flood EM with liquidity, and then take advantage of the inevitable cyclical liquidity retreat to pick up assets at pennies on the dollar. Does it want to give that up?

Crucially, is the Fed going to extend swap privileges to the PBOC? The same China that was in a trade war and is still is in an undeclared Cold War with the US? That just announced it will kick out a slew of US journalists from both the mainland AND supposedly-autonomous Hong Kong? That has had officials publicly claiming COVID-19 is a US military operation? The implications of doing it and not doing it needs a whole report in itself – but either way there is a whiff of fin-de-regime about it.

Emerging market now have foreign borrowings approaching $20tr USD:

Some large portion of this is denominated in USD.

But, as Rabo says, and as Zoltan Pozsnar has been screaming about, many of these do NOT have USD swap lines with the Fed. So, as global markets go to shit, credit markets sieze up along with local bank funding costs and lending, everybody needs to get their hands on USDs to unclog systemic margin calls.

Because they don’t have swap lines, they are forced instead to sell USD assets, even Treasuries, to get the USDs that they need.

The rising yields spook markets and force further liquidation of equities which, in turn, triggers even more liquidation of Treasuries as the trade of the cycle – risk parity – convulses through forced deleveraging.

In short, the entire viruous cycle of reflation of the past cycle is now in a dramatic, accelerated and self-re-enforcing unwind.

The Federal Reserve can manage this and slow it down but it has two problems in doing so:

  • first, it is moving too slowly and is way behind the curve, and
  • second, it does not have the swap lines and to get them into place is, in part, a geopolitical decision.

For instance, why would the White House, or any American for that matter, want to offer the PBOC a USD swap line today? To do so will literally be re-liquifiying its major geopolitical rival just as it tries to blame the US for the very Chinese virus that is killing Americans.

And many of the dollar-dependent EMs are stragetically aligned with China as well as its commodity demand has drawn them in over a decade.

What we have here is a catastrophic mismatch between reserve currency status and geopolitical reality.

This is both an immense risk and opportunity for the US. The Fed might re-liquify those nations that are US-aligned or teetering between the US and China, while ignoring those that have flown the strategic coop to China and China itself. That can win some nations back to the US sphere of influence, as well as punish those that don’t, and it may be enough to short-circuit the Treasury liquidation.

The risk is that such geopolitcally selective swap lines are not enough to end the liquidation and everything that prices off a skyrocketing risk free rate goes to zero. Including the Australian dollar.

Then the world finds its own new reserve currency and the US empire collapses.

Enter Donald Trump – the man, the legend, the scandalous buffoon – to make the fateful call.

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


          • The Gideons are kindly handing out free toilet paper conveniently packaged as a bible!
            Available for collection now at your local roadside motel.

          • Stewie GriffinMEMBER

            Noble keyboard warrior suggests – “wipe bum with bible”

            …because ragging on Christians is the cool thing to do.

            Meanwhile at countless religiously run institutions providing support to the community, in volunteer work, hospitals and medical services, through to pantries and food deliveries to the poor, thousands of volunteers or lay workers doing jobs that would normally pay more, devote their time and risk their lives providing assistance to the community for no other motivation than they believe their God manifests their in society as an expression of their people sacrificing for the common good and to make the world a better place. Not to mention the clergy who will provide countless pastoral and counseling to grieving individuals who’ve lost their loved ones.

            How many strangers are you going to help through the grieving process?

            Wipes bum with bible. Ha ha.

          • Yeah Stewie whatever, and who are you to judge, you’d be surprised at what me and my ilk do,and I don’t need a book full of plagiarised myths purporting to represent the views of one of several thousand invisible sky pixies to guide my moral compass.

          • And while I’m at it, it’s taken centuries to get to the stage of society starting to shake off the shackles of religious bigotry, but even today we still have to tolerate the bronze age dogma permeating society. Recently we’ve had issues where they still try to influence various outcomes. Where was the solace in regards to Gay people? Where was the solace in regards to centuries of child abuse,? countless lives destroyed and still trying to hide the fact.

            As far as councelling and mental health issues, see a proffessional..

          • Stewie GriffinMEMBER

            Sky Fairies are for the simpletons and those who would dismissively imply that that is all of what religion or faith is about. They generally sit in the sweet spot of the Dunning-Kruger curve, supercilious know it all know nothings.

            As for judging you – there is only one thing I generally judge a person about, their Hypocrisy. I’m straight up about my reasons for disliking various religious or cultural groups, and I regularly cop valued judgments from others. Fair enough.

            But my accusation of Hypocrisy is just as much to the rest of the Macrobusiness community, who point the finger at me when I enunciate my reasoned position for opposition to things like Multiculturalism and other faiths and cultures dwelling within my own, and yet who stand by silently when it comes to kicking down on our cultural elites favorite whipping boy – Christians.

            I note that when it comes to casting slurs and valued based degeneration against Christians ergo, using the bible as toilet paper, it seems to be that anything goes. That you bristle at the accusation gives some indication that you know it to be true.

            Since you seem to be in the middle of the DK curve, quite simply, religion is the expression of values in a society and “God” if there is such a thing is merely manifested in the behaviour of that society and the values they adhere to – do you want a happy God or a vengeful God? Do you want a loving society or a harsh neoliberal one? Just as mentioned elsewhere the problem with Democracy is that you get the leaders you deserve, so to societies suffer under the God that their values or lack of, result in.

            As to the crimes of the evil individuals who have sought to bury themselves in all our institutions, yes the crimes are appalling. Apart from the victims themselves there are no people more betrayed by their crimes then the countless volunteers and workers who dedicate a large part of their life to attempting to make society better, and seeing it tainted by the vilest of crimes, and then apparently shielded by both bureaucracy and further insidious layers of complicit behaviour that you so often find when pedophile networks invade any institution.

            While you might consider yourself so more advanced, so more evolved and so more intelligent than the average man of any generation whose come before you, the fact is your entire existence rests on the shoulders of their labours and beliefs.

            That things like religion and faith are so meaningless to you today, says more about your fat, easy, soft existence, that has been afforded to you, than the vast majority of people who have come before you. Their existence was finely balanced on a knife edge of simple survival that most societies and people have lived throughout the centuries.

            The importance of unified faith and belief, while amusing for you, ‘modern man’, with all your modern luxuries and conveniences, provided the glue by which they were able to collectively hold society together and put meals on their table.

          • Really, Dunning Kruger, after a screed like that, you don’t do irony do you, and you call me a hypocrite.You might have got away with supercilious bumpf like that a few of decades ago, but now days you can get called out on it. Where not all sitting in the corner cowered in the belief that we are going to be struck by lightning for so called blasphemy by an omnipotent rabbit.Unbeknownst to you,humanity is/has moved on.Well a growing portion of it.
            opposition to things like Multiculturalism and other faiths and cultures dwelling within my own

          • Something funny happened there, and half my post got posted anyways cont
            “I enunciate my reasoned position for opposition to things like Multiculturalism and other faiths and cultures dwelling within my own” I don’t know your reasons for opposition to multiculturalism and other faiths, and I don’t care, perhaps your a racist and a bigot. Brandis said people have a right to be a bigot.

            “I note that when it comes to casting slurs and valued based degeneration against Christians ergo, using the bible as toilet paper, it seems to be that anything goes. That you bristle at the accusation gives some indication that you know it to be true”

            I bristled at being called a keyboard warrior When Im such a sweet inoffensive little fella
            I take it your next paragraph is an attempt to try and imply that values all come from religion,well that argument has been done to death by better men than you and I for decades. In other words a paragraph of post filling bumpf and rather good portrayal of Dunning Kruger.
            “While you might consider yourself so more advanced, so more evolved and so more intelligent than the average man of any generation whose come before you, the fact is your entire existence rests on the shoulders of their labours and beliefs.”

            AAhhh, the subtle insult
            “That things like religion and faith are so meaningless to you today, says more about your fat, easy, soft existence,”

            The not so subtle insult. You know absolutely nothing about me. What I’ve done and haven’t done. Keyboard warrior.

          • And your last paragraph
            “THE importance of unified faith and belief, while amusing for you, ‘modern man’, with all your modern luxuries and conveniences, provided the glue by which they were able to collectively hold society together and put meals on their table.”
            In your opinion

          • Stewie GriffinMEMBER

            You’re entitled to your views and opinions wobert, all 3 of them, just don’t suggest that someones holy book, be it Bible, Koran or Torah be used as sh!t paper. Criticise what they may preach by all means, go nuts on attacking their values and what it is you don’t like about them. But using their holy book as TP? It’s lame, its weak, and its punching down.

    • Newsprint ok, but need to scrunch it first to break down the fibres and make it soft and effective. Or use one hand to eat and one for the other end of things

    • Someone wrote recently that given the lack of toilet paper at supermarkets they’d taken to wipe their bum with Lindt Easter bunnies – in plentiful supply.
      Results pending…..

        • Yep. Gold falls 1st pulling the ratio down then silver rallies 2nd pulling it down further.
          The gold price fall is happening now but will reach support due to all the money printing and that many/most forced liquidations to cover equity margin calls have washed through the price action.
          The rise in silver will not start playing out until another 1-2 months passes. Maybe longer.
          I am basing this on the price action of gold and silver from when Bear Stearns went to the wall then Lehman then China’s debt fueled GFC rescue.

  1. any chance we could have an alternative scenario just in case bond yields are flying up due to possible inflation down the track (desperate CB’s piling in and fiscal), supply shock turns out much greater than thought. Any thoughts on medium term impact on equities?

  2. “.. After all, it isn’t like the Fed isn’t already offering trillions to the markets via an ever-expanding alphabetti spaghetti of channels..”

    Every channel except the one that counts.

    A large democratically controlled Federal Reserve balance sheet.

    Democratic? Accounts for every US citizen who wants one.

    Money that can’t be destroyed by imploding speculative vulture funds.

    Money that is always there in someone’s account even if it is not yours.

    100% and perfectly liquid and not burden by usurer ticket clipping.

    Not complicated and does not impinge the freedom to invest some betting chips in dodgy private banks ……if you feel lucky punk. But no taxpayer guarantees for you.

    So if now is the time for hopes and prayers and not firing up the reform brain cells when is the right time.

    I suppose today we just wait and see what Governor Phil is going to do for rich people on our dime?

    Lots of cheap credit so they can pick up quality assets for peanuts?

    Lots of good prices for their financial assets (QE for Bankers)

    10 years since the GFC and nothing was learned.

    Australia the lucky country.

    • Caveat: I am not half as smart financially/economically as most of you….so be gentle (this means you, mostly, Generalisso Peachy). Not advocating either way, just thinking what if…

      And I know lots of you say (and are probably right) house prices are going to be like Coles’ prices with a Status Quo song wrapped around them….

      But…if it is as you say Pfh007, could we see massive asset transfer and/or increase (in sections) to the 1%….(whatever that is) and those currently cash rich with low debt….

      I mean, lot of houses/property transfer from those at the margins/recent buyers/those that lose jobs (but don’t get no stinkin’ stimulus)…

      I am thinking house prices bizarrely and very counter-intuitively up, or, stable/off slightly but sold under duress to cash rich/asset rich/those with access to credit…

      Gee I used a lot of ellipsises

      • BigDuke6MEMBER

        I’m a novice too but all I know is Aussie house prices never seem to go down as much as I expect or want them too. Why ? Because .gov will bankrupt the country to prop them up. I read something on yesterday where they were having a good old chat. One said “house prices will not go down while everyone wants to live in the cities….”
        as Merlin said – ” its easy to love simplicity in a child…”
        While my super only has gold and oil in it I’ll be looking at adding to my NCM rather than oil. I was thinking of getting out when the slippery NCM CEO sold 2 months ago at $36 but who am I kidding , I’ve been a gold bug for 20 years and its not changing now.

      • The Traveling Wilbur

        House price crash?

        Never be allowed to happen.
        The LNP will decide you’re paying my mortgage before we’re even close to one. 18-months… LOL.

        And I used precisely the appropriate number of elipsis.

      • We buy and sell property in $ of the day, nominal, but when looking back at the value of property changes it is instructive to view them in real $ because inflation expectations play a big part in current real asset pricing.
        Real price falls in the early 90’s, the last time Aust had a decent recession which involved unemployment, (like the one we are now entering) the real declines were massive. That is, adjusted for purchasing power, the value of houses in the early 90s absolutely took it in the ginger.
        I think we’ll see that same theme play out this time. Inflation will be brought on by ZIRP and QE and house prices will see falls (albeit not great in nominal % terms) meaning the falls in real $ will be horrendous.

        • In the short-term, yes.

          The miners are getting destroyed right now – that’s a liquidity thing.

          The actual gold price is holding up quite well under the circumstances which means (to me) that the physical holders of gold are sitting tight while the leveraged speculators have been liquidating. The dollar ‘shortage’ dynamic could last a few weeks but that’s really not a reason to sell gold – the flip side of this dollar shortage is going to be a dollar glut and then gold is going to rally hard. I just don’t see how it can be any other way.

          The only caveat is that you can’t eat gold so if you’re starving then you’ll need to sell to go to cash. But that’s an Armageddon scenario, in which case, your investments and the value of your home won’t matter any more.

  3. This will be like a tsunami — the tide goes rushing out (USD spikes bigly) and people run up the beach to see where it went, and then …. the tide rushes back in and drowns them all (USD tidal wave).


      • Sure. This shortage of dollars is not really a shortage, as such, it’s more about accessing dollar funding. When times are good / normal, dollar funding is plentiful (and the dollar trends lower as a result). Basically dollars are ‘created’ out of thin air by the commercial banking system. It is also why banks outside the US — and in emerging markets, in particular — are happy to make dollar loans.

        Banks make money by borrowing in the wholesale market (short term) and lending for a longer time – a yield curve play. Therefore they have a maturity mismatch — which is risky, particularly when dollar funding dries up — like right now. Although the Fed has made trillions of dollars available to the global banking market ex-Asia, there is massive default risk so those institutions that would normally be happy to make dollar funding available have shut the gates, meaning that heaps of financial intermediaries in the EM are frantically scratching around for dollars, anywhere they can find them and at any price (think of the behaviour of the food hoarders recently. Same thing).

        The corollary of this is that, in order to prevent a wholesale melt-down globally the Fed, which is already flooding the system with liquidity, is going to have to print more money to start buying up rapidly plummeting equities, HY bonds, Corporate bonds, MBS, Treasuries etc. Basically everything that needs a bid.

        The reason the Fed’s present liquidity interventions are not having the desired effect is that it is not universal and so it’s the marginal borrower outside the Fed’s liquidity loop that is driving the demand for dollars / dollar funding. There are $20 trillion of loans outside the US (maybe in EM alone?). That’s gargantuan. The impact of trying to secure even a fraction of that much funding is enough to obliterate the financial system.

        Once this is all over there will be so much liquidity that the Fed is going to have to claw it all back in order to prevent massive inflation. Can they do it quickly enough? To what level would they need to raise rates to prevent wholesale dumping of trillions of unwanted dollars? 20%? 30%?

        This a sh*tshow of epic proportions. To Damien Boey’s point the other day – is this the end of the fiat money system? For mine, I’d say there’s a better than even chance of that being the case. I don’t see how it can survive this, particularly if the crisis goes on a for a few more months.

        • I don’t see how the financial system can survive this as well. I’ll not sure exactly how it’s going to happen (deflation before hyperinflation?). I’m pretty certain of the outcome. I’m buying more gold. In addition to the gold in already about to buy. The aud id’s dropping faster than i expected

          • Deflation before epic inflation sounds about right to me. Yep, if you’re going to buy PMs better to do it now rather than when there are queues round the block at your bullion merchant and it’s going up $100/oz per day.

  4. Doug again

    It was as if global markets pulled elements from the 1994 bond market dislocation, 1997’s Asian Bubble collapses, the 1998 Russian/LTCM fiasco, and the 2008 market crash – and synthesized them for a week of ridiculous market instability and dysfunction.
    Bingo!!! because each time the damned can was kicked down the road. Inevitably, eventually there is such a pile of cans that, when you kick them, they don’t move.

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