Do robots dream of higher Australian dollars?

See the latest Australian dollar analysis here:

Macro Afternoon

DXY is getting belted now as EUR surges into the Great Fakeflation:

The Australian dollar hit new highs last night before pulling back:

It is murdering EMs:

Gold managed a gain but is still disappointing as DXY falls:

Oil marches on:

Even dirt raised an eyebrow:

Miners blast on:

The EM stock bid stalled:

But junk blasted on:

Bonds were all hit:

Stocks fell marginally:

Westpac with the wrap:

Event Wrap

The ECB left its key policy rates unchanged (deposit rate -0.50%) but increased its Pandemic Emergency Purchasing Program (PEPP) by EUR600bn to EUR1.350tr. The increase was larger than market expectations of between EUR250bn and 500bn. It was also extended until “at least” the end of June 2021 and maturing assets would be reinvested until “at least” the end of 2022.

Eurozone April retail sales were not as weak as feared, at -11.7%m/m (vs -15.0% expected).

US weekly jobless claims at 1.877m was close to expectations, although continuing claims at 21.487m were above the 20.0m expected. April trade balance was close to expectations at -USD49.4bn. The widening of the deficit was due to a decline in exports of 20.5%m/m whilst imports declined 13.6%m/m.

Event Outlook

Australia: The AiG Performance of Services index fell to a record low of 27.1 in April. In the May update, the focus will be on signs of recovery as the economy reopens.

US: Westpac (and the median analyst) expects that non-farm payrolls fell by 7500k in May, lifting the unemployment rate to around 20.0%. In this period of heightened labour market volatility, the participation rate will play an important role in determining where the unemployment rate ultimately lands. With rising job losses and increasing spare capacity, May average hourly earnings are expected to slow to 1.0% after April’s spike. Consumer credit data is also released. Credit card debt has plummeted during the lockdown, with consumers being restrained in their ability to spend. The market is looking for a record fall of $20bn in April.

The Great Fakeflation – a three year financial cycle compressed into three months – is now entering its final fantasy. We’ve seen the boom, the bust, the safe haven DXY, the stimulus, the bid for “bargain” stocks, the falling DXY, the run back to EMs, the rotation to value and now, the final convulsion into fantasy, the inflation panic and bond back-up.

Every decent strategist understands this cycle. Indeed, you could write it into an ago, and let it bid each phase. Perhaps that’s what has happened. Via Nomura:

Nomura thinks that it is possible that CTAs (systematic trend-following investors with a top-down perspective) are being pressed into a further portfolio shift away from overweighting bonds towards overweighting equities. For the moment, CTAs’ positions still show a preferential tilt towards long positions in bonds (DM government bond futures). However, the prospect of a bottoming out in the economy (as pointed to by the improvement in the economic surprise index) has probably made bond-buying a less appealing idea from a technical standpoint as well.

Indeed, if we look at the one-month rolling correlations between actual CTA performance (as measured by the SG CTA Index) on the one hand and stock market or bond market performance on the other, we find that CTA performance has been inversely correlated with the performance of equities (normally an indication of short positions) and positively correlated with the performance of bonds (normally an indication of long positions). If nothing else, this would seem to make it clear that CTAs have been slow to get on board the current equity rally, and that a sell-off in bonds is still the pain side for them.

So at what level do CTAs capitulate on their bond longs and turn short, unleashing a selling cascade?

According to Nomura’s CTA position index (representing our estimate of the positioning of CTAs based on real-time data) CTAs to still have a net long position in 10yr UST futures, “although with a conspicuous notch recently where that position appears to have hit a ceiling.” This means that should the pressure created by global macro hedge funds’ sell-off of USTs increase to the point that the 10yr UST yield climbs above the “red line” that exists at around 0.84%, CTAs would likely be drawn into exiting their long positions in TY to cut their losses.

The Great Fakeflation has nothing to do with the underlying economy:

  • China has barely managed a 90% recovery;
  • the US isn’t going to get that far as it’s virus fight turns interminable via half lockdowns;
  • EMs are going into the virus not out of it;
  • Europe is an export economy leveraged to the above three.

So, what will happen as the Great Fakeflation, processed through the imagination of an algo, comes face to face with reality sometime later this year?

The cycle script typically ends with a bursting asset price bubble as inflation surges into monetary tightening.

Australian dollar to follow.

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


  1. DominicMEMBER

    As mentioned in a previous thread, the alternative scenario here is AUD to parity with the USD in the next 2yrs.

    The basis for that call is that is substantially higher commodity prices. Relative to stocks they (commodities) have not been lower, perhaps in all history. Once at rock bottom there is only one way to go …

    The last time the AUD was trading at over 1.00 USD, commodities were booming

    • DingwallMEMBER

      Booming is a somewhat light term compared to the brrrrrrr frenzy of hoovering up all iron ore,coal, copper etc available and screaming for more

      • DominicMEMBER

        The cure for low prices is … low prices. All the capital has been flowing into the tech sector for years, starving the commodity sector of investment. The point being that the process of throttling back commodity supply started a while back. While Covid has dented demand further, supply of dirt will simply continue to throttle back until it’s delivering a return that’s acceptable to investors. In the meanwhile, central banks have been increasing the number of money units in circulation at an eye-watering rate.

        Steeply increasing money supply plus decreasing commodity supply = higher prices (guaranteed).

          • DominicMEMBER

            US shale supply has cratered.

            Why would you continue to supply a market unprofitably? It makes no sense. Econ101.

        • Yes, and decreasing the value of savings in the bank. Savers are watching as property prices continue not to reduce and the value of their deposits reduces.

    • RatedAAAMEMBER

      AUD Rates were also at a decent premium USD rates at that time, not anymore.

      • DominicMEMBER

        It’s an export-related thing: 100% of dirt exported shows up in the GDP calc for straya where as Apple iPhone barely moves the export dial for the US. USDs earned by strayan are sold and exchanged for AUD. Said otherwise, downward pressure on USD and upward pressure on AUD.

        But, let’s see how this pans out.

    • verzijlMEMBER

      The difference in US and AUS cash rates drove a lot of carry over trade which saw a strong AUD in 2012 – The AUD fell when the RBA reduced our cash rate and continued to fall with every cash rate reduction since 2012

  2. Most Robots that I know dream of extreme Volatility and achieving a millisecond or two order processing advantage, but to be fair the Robots that I know are all very specialized, very deeply embedded in the system. Robots will go to their grave claiming to not understand the term Front-running yet simultaneously make a fortune from it, go figure.

  3. As for Inflation, Yeah Nah
    I can’t imagine any global scenario where Wage inflation spikes without Product price inflation and I can’t imagine any case where Product price Inflation exists alongside demand deficits.
    If you ask me demand deficits are Deflationary yet into this Deflation we have every Central banker on the globe dumping Money, wheres the money going to go? Logically it has to flow into Assets.
    So my base case is Asset Inflation with Wage stagnation (sounds like a repeat of the last 8 years)

    • DominicMEMBER

      Let’s circle round later in they year and chat again. From a report from Deutsche Bank (London):

      ” Our economists note that food prices in the United Kingdom have risen 0.8 per cent in the last week according to the ONS (an annualised rate of 54 per cent). Pet food prices have risen a truly hyperinflationary 6.2 per cent (annualised: 2,575 per cent). Of course, these two factoids don’t settle the matter, but it is significant that prices on the few number of goods the statistical office can still collect appear to be gathering steam.”

      But I’m sure it’s just ‘transitory’ …

      • Granted Food is the outlier where Supply is a big unknown because it is affected by things like the weather and Global food commodity imbalances, CB’s take food inflation with a huge grain of salt. But it’s Product price Inflation which really blows CPI out of the water and Global product price inflation can only happen because of Resource price flow through or higher factory utilization rates. I can’t imagine any case where product Demand deficits and capacity over utilization can simultaneously exist, so as far as I can see resource cost flow-through is your only path to Product price inflation.

        • “Inflation, Yeah Nah”
          Totally agree. Oil at zero. Cant possibly be inflation.

          As long as the money printing presses are printing you need to stay long assets.
          ECB announced last night QE program of $1.35 trillion euros.
          Say what!

        • DominicMEMBER

          The inflation argument is simple: wall of money meets declining supply of goods just as demand ramps up post-Covid. It’s that easy. And that’s the way I’m positioned and sleeping very well at night. There are precisely zero examples in modern history where deflation has taken hold, but we can always hope 😉

          • There are precisely zero examples in modern history where deflation has taken hold,
            How would you characterize Turkey / Iraq post Ottoman Empire or China when it love affair with opium somewhat diminished their work ethic. USSR post 1990. In all these examples you had both Inflation and deflation simultaneously occurring.
            A good modern example that comes to mind of Asset inflation (hording) giving way to price inflation with sustained wage growth was Germany post 1948 currency reform. But why did they need the currency reform? In my opinion globally we’re quickly converging on the same hopeless corner case that necessitated German currency reform. When we reform we’ll have inflation and bucket loads of it.

        • DominicMEMBER

          I think you missed the ‘modern’ when I mentioned history – perhaps I should have said ‘recent’, for clarity.

          We have a fiat money system in situ right now – there will never be deflation while money can be created out of thin air.

          Under a gold standard, yes, under fiat, no.

  4. DingwallMEMBER

    Later this year? If 3 years is compressed into 3 months,it could be next week.

  5. Goldstandard1MEMBER

    It looks like the stimulus money has forced the cycle to go through 3 years in 3 months because it’s afforded the market to speculate prices to best case scenario balance sheets 3 years into the future. Essentially ignore the pain.
    Reality is that you can’t look through that pain and choas as reporting seasons come and go so I expect that to come to pass around Aug/September also (same time as wage supports are removed). We will be in a different reality (actual reality) by Christmas ’20.

  6. The90kwbeastMEMBER

    AUDUSD is getting some serious legs, it’s been in a positive upwards trend using 10/35 day moving averages for ages now…

    • DingwallMEMBER

      So has the S&P500 ………. If you like trends and think it’s only going up, get on board

  7. What?
    The cycle script typically ends with a bursting asset price bubble as inflation surges into monetary tightening.

    Soooo…. interest rates going UP? I dont get it.