The Australian dollar has big Euro problem

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was hammered again last night as EUR blasted off:

The Australian dollar was soft against DMs:

But powered against EMs:

Gold is poised for higher:

Oil was smashed despite OPEC cuts:

Metals did better:

But not miners:

EM stocks fell:

And junk:

Bonds boomed:

Stocks swooned:

China’s virus has spread everywhere now and is exploding in Europe:

It looks to me like Europe has taken the path of Philadelphia instead of St Louis:

1918 Spanish Flu epidemic death rates per city

It’s far too late to close borders. This was a conscious choice to share in Italy’s pain to support the Eurozone project. I hope it doesn’t backfire.

Anyway, what lies ahead is some combination of mass casualties and localised shutdowns that will smash the EZ into deep recession over the next quarter. I hope its dodgy banks are ready.

What is most interesting is the bid for the EUR which is now looking quite persistent amid the crisis. The answer is the unwinding carry trade, previously from the FT:

The euro has entered a new phase, according to Deutsche Bank, rivalling Japan’s yen as the currency everyone wants to borrow — but no one wants to own.

In a research note published this week, London-based strategist George Saravelos said the European single currency could be expected to be trading at around $1.40 now, as investment flows have “swung to a huge surplus”. Instead, it is pinned around $1.10 due to what he describes as a large set of other outflows.

Crucially, he said, Europe has become a big lender to the rest of the world, marking “an important regime break” for the currency. Loans by eurozone banks to non-residents have climbed to levels not seen since 2008, while euro-denominated liabilities of non-EU banks have picked up sharply.

On Deutsche’s estimates, about two-thirds of the eurozone’s €455bn surplus in its balance of payments over the past 12 months can be attributed to such activity.

…“The euro is likely to exhibit increasing ‘carry trade’ behaviour where depreciation is gradual but appreciation pressures sharp as positions are unwound,” Mr Saravelos said.

And so it is. It does not appear that thre market is onto it. It keeps moving EUR shorter:

So the bid might turn even more violent as the risk unwind continues.

For the Australian dollar this is a very unwelcomed development. I still expect it to fall versus all major developed economy forex but a tumbling DXY will make it much harder.

This might have been offset by an aggressive central bank but we have the pansy RBA obsessing over a 25bps pop gun when it should be loading up the QE howitzer.

The good news is it is very gold bullish as DXY succumbs.

We have rebalanced our forex holdings across the USD and EUR because we simply don’t know how sustained this break with tradition will be. A strong EUR might reverse as the virus shock turns financial shock, or intensify.

Even so, I expect material new lows for the AUD against both because Australia’s economy is by far the worst positioned with six months of winter, virus and shut down ahead versus only a few for the northern hemisphere.

David Llewellyn-Smith is Chief Strategist at the MB Fund which is very conservatively positioned for coronavirus risks including a falling Australian dollar. 

David Llewellyn-Smith


  1. St JacquesMEMBER

    What is very interesting is how we’re now so predictably in danger of running low on all types of medical supplies given our pathetic, almost third world level of dependence on foreign imports of nearly everything now that foreign suppliers are desperately producing for themsleves. Nobody could have seen this coming. ™

    • Fox and the Hound

      Find me a single person who criticised this state of affairs — you cannot.

      • HnH and LVO have been consistently raising the issue. MSM as supporters of neo-liberalism (and funded by the beneficiaries of N-L) have avoided the negatives of the situation.

        • Ah, didn’t see yours ITAg, distracted by werk, should have refreshed.
          Actually ag is a good example. We did or still do make, or at least develop some good stuff here – GP Graders (are they still in your neck of the woods?) and small manufacturers like Fix engineering.

      • Are you joking? Surely you’ve read in these pages of the disintegration of domestic manufacturing, reliance on fuel imports, eroded skills base etc.(there are many examples) and the remaining economy of Houses and Holes. Heard of him? It was even an explicit part of government policy – we had one big shot in the locker with RSPT that could have halted or even reversed this decline. Gone, hopefully not for good – the opportunity to reset is almost here.

        • DominicMEMBER

          The silver lining is that as the pendulum swings from globalist expansion in the opposite direction, and nation states reassert their sovereignty there will be plenty of opportunity for budding entrepreneurs to fire up local production again. That said, structural reform still needs to occur (especially here) in order to create the necessary environment in which this can occur.

          • Agree Dominic. There’s a lot in this ‘structural reform’ thing, we still have enough workshop/corporate memory and entrepreneurial desire (but probably need to entice our bright young and old to return from their manufacturing nests elsewhere) but it needs wisdom and political vision beyond the electoral cycle. That’s the bit that concerns me most.

      • Well that’s plainly untrue.

        Plenty of people have been criticising it for years.

    • darklydrawlMEMBER

      Bingo! Excellent point St. J – and here is additional evidence. South Korea is largely restricting export of surgical masks – saving supply for domestic needs. From ABC America.

      “The South Korean government has implemented draconian measures to secure and distribute face masks to the public amid the outbreak of the novel coronavirus.

      Manufacturers of face masks must immediately cut down mask exports to less than 10% of their total production, and more than half of production must be supplied to government designated sellers, the Ministry of Food and Drug Safety announced Thursday. “

  2. “… For the Australian dollar this is a very unwelcomed development. …”

    Unwelcome but totally and entirely predictable.

    Our trading rivals have been engaged in a program of competitive devaluations since the GFC.

    They do this by exporting capital to clown circuses like Australia who think they are attracting this unproductive predatory capital with their good looks AND by blocking, by hook or by crook, capital inflows to their economies that are not clearly productive. Tried buying some land or key industries in China lately? No didn’t think so.

    It is a simple and very effective strategy but totally beyond the comprehension of your average Aussie politician or most of our economic scribblers who genuinely seem to think it makes “sense” for developing countries or developed countries to be exporting capital to Australia for reasons beyond manipulation of exchange rates.

    If our economic commentators had more sense they would be demanding that the government take action to restrict unproductive capital inflows rather than pretend that the RBA can outgun the world by breaching it’s charter and further wreck the economy with manipulations of the target rate and commencing a program of fixing / supporting the prices of financial assets held by the banks, e.g. bonds and mortgage securities. (QE for Bankers)

    • Yes, but we still have a few more items in the great Aussie garage sale to go.

      Plenty of land left to sell and inventive Premiers like Gladys are thinking up new tax streams to flog off every day.

      • Fox and the Hound

        If it meant creating even one Job™ we’d sell our citizens as slaves.

        Well I guess we pretty much did that with the mortgages!

      • beside few adventurist rich people none really sees our land as attractive
        way to far and crowded

        even foreigners who bought our land at the local minimum in 2012 and sell now at the peak will lose money thanks to AUD

        • DoctorX,

          Our universities are proof that the queue for admission to Oz is long and they are willing to pay serious money.

          Foreigners might sell but they can only sell if there is a buyer and new buyers are arriving every day…..even if their intention is run the property as a boarding house. We have been there before when old inner urban houses were cut up into flats post WW2.

          Our biggest problem is that our upper middle class on the left and the right have a bad case of cultural cringe and generally despise Australia.

          That is why they support “sell out and sell off” economics and constantly feel embarrassed about being Australian.

          • post WWII we had shortage after years of not building and rampant immigration
            now we have million empty dogboxes, travel ban and rising unemployment

            we should compare out situation with 30s not 50s

          • DoctorX,

            Millions of empty dog boxes?

            What like there are millions of empty shoes in people’s houses?

            Until the bedroom liberation army liberates (and I support their efforts) all these empty dog boxes and bedrooms and makes them available for rent they are irrelevant.

            It is worth keeping in mind that attempts to force people to stop hoarding their properties are likely to be resisted. As the bedroom liberation army well knows.

            We have seen in Perth, what happens when vacancy rates stay above 4% for an extended period. Prices and rents fall. And this happened with super cheap credit available.

            So faced with open borders and hoarder friendly policies and hoarding tendencies there is a shortage of housing available to rent and it is likely to get worse as construction is credit crunched.

          • since 2000 we built 650k more dwellings than we managed to occupy (despite huge immigration) – not rooms, dwellings
            and that’s why rents are falling while prices rise
            hoarding properties is a national sport as long as there is a promise of capital gains at the end … but that promise looks further and further
            not sure where you are getting your open birders but the likelihood of borders being closed toward most of the world over the next 6 months to a year is large

        • happy valleyMEMBER

          I truly feel for all those foreign money launderers who washed their dirty money through the great Strayan dream.

      • WE can still do our “Alaska” deal by auctioning off the troublesome part of Australia north of the Tropic of Capricorn to the highest bidder – the CCP with Gina/Clive?

  3. migtronixMEMBER

    Well that was fun. S&P close to losing 3 handle and people talking about negative rates in the USD… What fresh hell is this?

  4. Let us not complicate things with too much theory.

    The USD will continue to fall as the Fed cuts rates/eases monetary policy, but the USD is the one to own when the easing stops.

    • DominicMEMBER

      The easing won’t stop. It kicked of in earnest in 2009 and has, with odd pause never let up.

      And it’ll get a lot worse yet. You’d be safer in gold or other PMs

  5. Italy was already in deep trouble before the virus. This os going to crush Italy. The north is the engine room of the country and it will be in lockdown.

  6. – Yes, the big surprise is the rise of the EUR / USD cross. I expected to see this forex cross to fall during the recent market sell off, but it didn’t. Odd, very odd. Don’t know what to make of it (yet). Although my personal opinion is that the EUR / USD is going to fall and the Yen / USD cross to stay flat. Thereby expecting a falling EUR / Yen cross.
    – With interest rates in Europe so low (lower than in the US) one could / would expect to see the EUR / USD to go higher from here. But one has to keep following the charts and not one’s assumptions.
    – My main assumption (for the time being) is that the EUR will go down against both the Yen & USD.
    – Did the EUR become the currency for speculative & leveraged bets ? Does anyone have a guess / opinion on this topic ?

    • I’m just putting it down to short-term volatility – like everything else these days.

      I think the USD is still king, and that the US economy is much stronger than the EU economy – hence, medium-term USD bullish.

      My 2c

      • – Nope. One has to keep in mind that the US financial markets are the largest in the world. But when one is “long” USD denominated assets then one is automatically short the USD. That’s why I think ultimately the USD will rise over all the other currencies (including our AUD), but perhaps remain flat against the Yen.
        – But it will be a matter of “wait and see” if this assumption is right.