Has the Australian dollar bottomed?

See the latest Australian dollar analysis here:

RBA has indeed joined the global currency war and thank god for it

DXY eased again last night. CNY hit is lowest in 2020. Devaluation anyone?

The Australian dollar rally flamed out across the board:

Gold tried and failed again:

Oil doesn’t even try any more:

Dirt lifted:

Miners too:

And EM:

Junk led:

As bonds were bid:

Stocks lifted modestly:

Westpac has the wrap:

Event Wrap

Coronavirus update: Latest WHO data, via the Situation Reports, indicates 39,827 new cases on 24 March, slightly lower than the previous day. Unofficial source Worldometer indicates 36,135 new cases on 25 March.

US lawmakers reached agreement yesterday on a record $2tr stimulus package which provides aid mainly to small companies and individuals affected by the COVID-19 slowdown. The package is equivalent to around 10% of GDP. The Federal Reserve’s Bullard said it is “about right for the situation”, but added it was temporary relief: “This is not stimulus.”

Further key developments came from Europe with the relaxing of EU debt restrictions, Germany signalling potential debt issuance with no limits and providing total backing for their banks during the COVID crisis.

UK announced that they are days away from approving the release of some 3.5m finger prick tests to assess if people have or have had COVID-19.

US Feb durable goods orders rose 1.2%m/m (est. -0.9%) although the ex-transport measure fell 0.6%m/m (est. -0.4%m/m).

German March IFO slipped slightly further from the initial readings with expectations slipping to 79.7 (initial 82.0 from 93.2 in Feb.) taking the headline climate down to 86.1 (initial 87.7 from 96.0 in Feb.)

UK Feb. Inflation data showed a slight rise in CPI (+0.4%m/m, est. +0.3%m/m) with core CPI lifting to +1.7%y/y (est. +1.5%y/y, prior +1.6%y/y).

Event Outlook

The advance read of Singapore’s Q1 GDP is due, and the market expects a substantial contraction of 7.2%qtr annualised. February industrial production will follow, and is similarly expected to fall by 15.8%, with more weakness ahead.

In the Euro Area, February M3 money supply is expected to hold at 5.2%yr. Credit data is also due.

UK February retail sales are expected to have risen by 0.2% as stockpiling and precautionary saving offset each other. The Bank of England will convene at their scheduled meeting. However, the policy rate is expected to remain unchanged at 0.10% following significant policy easing at unscheduled meetings earlier in March, the last occurring on 19th March.

US wholesale inventories are expected to have wound down, declining by 0.2% in February. The market will watch initial jobless claims closely to gauge the impact of COVID-19 on employment. Claims are expected to surge to 1500k, well above the 281k claims seen last week.  Finally, the March Kansas City Fed index is expected to pull back sharply to -10 as US industry comes under increasing pressure.

I could show you one hundred different indicators as evidence that global growth is crashing. There’s no point. It just is, massivly and at unprecendented speed.

That raises the question of where are we in the crisis and, by extension, how real is this rally? My answers are not far and not real.

So far we have had the China virus panic. The Korean virus panic. And the Italian virus panic. Ahead is still the US and pan-European virus panics. That should at least end the biological leg of the crisis.

What comes next is the depression. A huge uneployment shock, never experienced in modern life. Take the US as example:

We then expect one final leg to the crisis. A return to the financial domain as the mass defaults from both business and households destroy banks worldwide. This crisis did not start with the banks but it will end with them.

That’s when we hypothesise a bottom is possible, for forex as much as stocks. Though it must be added that political and geopolitical crisies are also likely and may intervene.

However, in the Australian dollar’s case, it must be remembered that it faces two longer term headwinds. The first is our seasonality vis the virus. We expect a twin peaks scenario for Australia. As SloMo finally gets it together enough to retard the virus over the next few weeks, then he relaxes shutdowns, and we see another, larger apread into Winter. Thus we will be shut longer and sustain greater economic damage.

Second, bulk commodities are yet to crack but they will as global recession lands on China.

So, no, the Australian dollar has not yet bottomed.

David Llewellyn-Smith

Comments

  1. Has the Australian dollar bottomed? No
    Has gold bottomed? Maybe
    Has silver bottomed? Yes!
    Has uranium bottomed? Yes!!

      • I bet last week was the bottom when gold/silver peaked at 126.43 for the first time in the entire written history of Homo Sapiens. And the way in which the ratio blew out had a dinstinct feel of dislocation/collapse. You can always hedge your long silver position by shorting gold. Sure, your return will be less but the payout will be much more certain.

        • Shorting gold has been a loser for me. I set a huge stoploss and the bitch still spiked to it before dropping again.

          Lucky I’m only testing the waters with play money.

          • Sorry to hear that, myne. To be fair, nobody could have seen that extreme ratio coming. For the first time in the entire written history of humans. Never happened before.

            Not in the middle ages.
            Not during the American independence, the French revolution or the Russian revolution.
            Not during the two World Wars or countless other wars.
            Not during the Great Depression or the GFC or countless other recessions.
            Not during the 9/11 or any other terrorist attacks.
            Not during the Spanish flu outbreak or any other plagues.
            Not during any other market crashes in history.

            So could you remine me what was special about last week? One should be scratching his head. If there was no fundamentals whatsoever for the ratio to blow out like that, you can be certain that the ratio will revert to mean. You can be pretty certain when you have the entire human history backing you up.

        • almost every ounce of gold mined is still around. almost every ounce of silver mined has been used. ratio coming out of the ground is somewhere around 10:1 to 15:1. silver is hopelessly undervalued, or gold overvalued…

          • Yeah, but not much use for silver anymore as industry grinds to a halt. Gold is still proudly hoarded by my Indian Aunties, and the Chinese!

  2. Fx markets seem to be at a fudge point, as bankers try to swap and source the currencies needed for what little facilities theIr clients have left to roll / refinance. There’s a big lag in the data to where we now are, and yet again to the end of the virus.

  3. It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower. William J. O’Neil.

    • Actually, it is not paradoxical. Rather, they are two sides of the same coin.

      During a boom everyone rushes to the entry and during a bust everyone rushes to the exit.

    • Mike after having lived in China for nearly 2 decades I can tell you I do not for a nanosecond believe those numbers.
      However it is highly likely that the dose of the virus received upon infection plays a large role in the severity and therefore likelihood of death once infected. Italy, Spain, Iran etc are all very touchy feel-y cultures where very close personal contact is customary. Yes China has high population density, esp in their cities, but they are nowhere near as close to each other in many respects as Italy/Spain/Iran. It is quite possible that this will explain some of the difference in case fatality rates. The Germans are quite standoffish physically and they have a much lower case fatality rate. Of course virulence and deadliness of the various strains will also play a role. Only an idiot would believe the Chinese numbers, I suggest you find a new fight. The more important battle is to make sure that eventually the CPP is removed/changed so that Chinese domestic flaws never imperil the world again in this manner. They fcked up SARS and have done exactly the same thing again. Therefore something needs to change.

      • I am totally with you on the get rid of the CCP. I believe a dictatorship such as that has no place in the modern world.

        But I think it’s useful to point out this though as lying about numbers at the start of a pandemic is very serious business.

        As for the numbers, it’s more the 80,000 that I don’t believe, not so much the percentage. We are supposed to believe that a country with the fraction of population that China has got, got to pretty much the same numbers in less time? I’m just tired of the praise being heaped on China in our media. And even worse, those who are implying that it is a superior system as a result.

  4. In this bounce that we are having, how far do people think BBOZ will go down? I am thinking about topping up for the next drop

    • innocent bystanderMEMBER

      don’t know, still holding me.
      but I am sure you are aware it is a leveraged play?

      • yes i am aware of the leverage. i was a bit slow to the party so I’m holding for the next leg down but I was thinking I might top my holdings with just another small purchase.

          • I was busy figuring out how to spend 7K at the Perth Mint so I didn’t buy any today. My house deposit was split almost in thirds between USD cash, AUD cash and gold. I’ve put half of my AUD cash into the Perth Mint in the past week. So my house deposit is now more than half in gold (and a bit in silver). I feel relieved about having protected the purchasing power of my deposit. I can see reasons for them to continue to go up, but not many reasons for PMs to go down. I’ll think about BBOZ tomorrow with some play money. The rest of the evening was spent drinking gin and tonics over the fire pit and looking at the stars. That was really relaxing.

  5. the big question i keep asking myself is which country comes out of this the best – China? USA? another? (Russia?) This will be the big macro play i suspect.