Australian dollar wrecking ball swings towards economy

See the latest Australian dollar analysis here:

Macro Afternoon

DXY has broken support and is in free fall as EUR rips:

This has dire consequences for the Australian dollar. Though it did fall Friday night thanks to weak stocks:

It was strong versus EMs:

Gold is off the wall now as DXY plunges:

Oil is positively sober by comparison:

So is dirt:

Miners were soft:

EM stocks weren’t great either:

Junk fell:

US yields too:

As stocks fell:

These are now highly unusual circumstances.  DXY is very weak and a yawning chasm is opening before it. The thing is, DXY usually falls when the US economy is recovering, sucking in imports while yields are low, sending capital outwards to EM exporters chasing growth and yield. This is usually bullish for commodities and gold as both the monetary and fundamental tailwind drives prices.

What is strange this time is the US economy is not in recovery and its stock market is a quivering bubble. This has been created by the Great Fakeflation that has crushed yields and pretended there is recovery so markets have done stuff as if it were true.

This oddity is also driven by a rising EUR, as Europe outpaces the US recovery:

So, we now have a DXY precariously poised between a weak economy and stock bubble necessitating safe-haven inflows, and a global recovery plus better virus management in Europe necessitating capital outflows.

Last week this resolved itself in EUR and gold displacing DXY as the safe-haven as Europe delivered its first-ever eurobonds stimulus, mitigating fears of currency exits.

This situation could persist for a while and resolve itself benignly over time. If the European recovery remains on track, and EUR keeps climbing, then a falling DXY could help backfill earnings for the S&P bubble, leading to a slow deflation rather than an outright bust.

A Biden victory might play into this as well as multilateral relations lift and tariffs fade away as a policy tool.

But it could also resolve in a great conflagration and stampede back into DXY as stocks deflate, slamming gold and EUR lower, especially if Trump is re-elected or refuses to accept the result.

The swing factor might, in fact, be CNY. If the Chinese allow CNY to fall with the DXY peg then EM capital flows will get smashed in short order as China feasts on global stimulus with its own destructive supply-side expansion.

Over any longer-term, say one year or more, the EUR appreciation will fail without more fiscal stimulus because it’s not yet big enough, and imposes growth-sapping reform conditions, so its largely export-driven growth model will choke itself off.

Anyways, for now, it looks like EUR and gold are the new safe-havens. While that transpires, AUD will rise too, and this wrecking ball will swing towards the local economy and stock market with nobody, least of all the Lunatic RBA or fiscal Dunderberg, standing in its way.

David Llewellyn-Smith
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Comments

        • Just curious
          Edit Wow!!!!!
          Floating currencies would be OK if everyone obeyed what might be called the ‘natural’ laws of economics.e.g. If you run a CAD and you are the Reserve Currency then you have less money in your economy to the extent of the CAD. You don’t just print up dollars to replace it, thus perpetuating all the conditions that created the CAD and ensuring you will run CAD’s from now till eternity or your currency becomes valueless.
          Similarly, if you aren’t the reserve currency, you don’t sell whatever assets are most desirable to foreigners thereby perpetuating the need to do so from now till eternity or you run out of assets you own.
          Meanwhile, in the real world, Australia has to ”defloat”, stop selling off every asset we can find, run a CAS and then start buying back some of what we have sold.
          Pigs will fly; Crows will fly backwards; the monster will spit out the Great Australian Bight and put it back.

        • Martin Parkinson
          “I will be completely open with you,” he told the Sydney Institute last night. “Anybody who thinks you talk down the dollar or talk up the dollar is a fool.”

          “I mean what drives the dollar? What’s driven it up is the rising terms of trade. The world is trying to give us a massive amount of wealth.”

          “If I tried to lower the dollar I would be really saying I am going to take part of that wealth, pour petrol on it, and I’m going to burn it.”
          Are these people all idiots, treacherous b….rds, or just own a lot of houses in Sydney and Melbourne.?

          • DominicMEMBER

            Lowering the dollar is the equivalent of arguing:

            In order to get richer you have to get poorer.

            Who benefits from a lower dollar? Exporters because the FX translation flatters the earnings in local currency.

            Who loses? The rest of the citizens, because the currency they’re earning suddenly doesn’t buy as many goods as it did before. Foreign holidays cost more, imported goods cost more etc etc. When the currency is lower everyone is poorer.

    • Arthur Mosley

      tolerance for lockdown is inversely proportional to the economic situation. Is your typical boomer going to be willing to lose $1m from their housing and share portfolio to save a few 90 year olds in nursing homes?

      The only people who are pro-lockdown are those who want to ride out the double dole as long as possible.

      • DominicMEMBER

        I never understood the reasoning behind the double dole. The dole payment was assured whereas jobs weren’t. Presumably the thinking was that the newly unemployed wouldn’t be able to survive on existing dole so it had to be raised — which is an implicit admission that it’s quite low at its existing level.

        Or an admission that someone with a hefty mortgage would be in serious trouble on the old Newstart.

    • You’d think so eh, but who knows, there’s apparently no end to the stimulus.

      I reckon there’s a pretty good case for a lawsuit against gummints propping up dead companies, turning them into zombies and moving them around as though they were still alive, sucking in the Robinhood dullards and other muppets with promises of rivers of (fools) gold.

      There’s gonna be a lot of those “I didn’t realise I could lose money on stocks” stories coming soon.

        • DominicMEMBER

          It’s a tough one isn’t it? Is it illegal? No

          Is it even unethical? Probably not.

          People are signing up to it of their own free will.

          There is practically little difference between Robinhood and Lotto or scratchcards or the Pokies or gambling.

          Just a variant, in the end.

  1. ErmingtonPlumbingMEMBER

    Kudos to the Macro boys for working and posting extra stuff on the Weekend.
    What’s going on?
    Have other streams of (rental?) income dried up and now MacroBusiness.com.au is Dave and Leiths only source of income?
    We had better all start posting MB stories on our Twitter and Facebook threads to help em out.
    Maybe even give a Macrobusiness.com.au subscription to a friend as a gift.
    I think we should all chip in to help out.

    • The Traveling Wilbur

      Euro and gold good (bid).
      DXY stinking.
      CNY neutral, unless it devalues along with future DXY sinking.
      Then EM economies share of the pie shrinks.
      AUD up. No matter what.

      As to the markets S&P stuff… is it going to go up or down? Yes. 😉

  2. What is the reasoning for a higher Australian Dollar with the RBA?
    They seem hell bent on doing the exact same thing they did after the last GFC and driving it through the roof.
    Who benefits? I guess our imports are cheaper but iron ore is priced in USD.
    No way this is accidental. There must be some reasoning behind it.

      • Absolutely correct. It’s remarkable how Lowe dismisses doing anything else now and studiously avoids talking about monetary conditions, which are tightening like crazy.

        Well, this time they’re in a pickle. Gonna be interesting to see them suck up and explain the collapse in inflation. I’m sure they’ll dismiss as just government charges and oil, until the trend keeps going down…

    • Because it increases our revenue from Iron Ore. Just because it is priced in US dollars is not really relevant – so is our dollar – so when it rises vis-us we rake in way more cash.

    • J I
      The RBA loves it because it reduces inflation and so makes the RBA look like they are doing something. Higher dollar means cheaper imports so we import more cheaper products. It’s a beautiful perpetual virtuous circle as long as you ignore the debt so created and especially ignore ALL the consequences.

    • Aussie dirt extraction costs are are in AUD.

      When AUD strengthens, costs (in USD terms because revenue is in USD terms – comparing apples with apples) increase.

  3. On a completely random note, has anyone else given themselves a wuflu haircut? You know, standing in front of the mirror with a priceline hair scissors.. Well, let me tell you, it’s another reason to hate the CCP. Just sayin.

    • Bitter Looser Renter

      Got myself Wahl cordless clippers from shavershop,

      Watched a bunch of YouTube videos.

      Made a bunch of mistakes

      But now have got it down pat:
      – no 2 with closed guard all the way up the sides and back
      – brief taper up from there, then just 2 finger length grabs and clip off the ends across the top

      I swear I will never pay for a haircut again.

      Best part is you can do it weekly and stay looking fresh and not worry about finding time to go to barber which previously I never managed to do more frequently than monthly.

      I actually love the CCP for forcing me to take the plunge.

      You just need to have the guts to make a few mistakes.

      General rule is much more off sides and back and go very easy on front and top which need much less off than you think.

      IMPORTANT: you must a use cordless clipper, it is impossible with a power cord.

      • Yeah I do that to my toddler son these days and it saves a truck load of money actually after a couple of times.
        A woman’s hair is another story. That’s left up to a specific craftsman hair dresser that a woman stays far more faithful to than any man in her life.

        • I am thanking TPTB I got a fantastic haircut in October last year and I had taken the plunge and chopped off near waist length hair to a short bob. The apprentice took forever but she did a really good job for $36. It is looking good now past my shoulders but I don’t want to get a cut, I don’t want my hair to grow longer but I guess I’m gonna have really long hair again. Luckily I don’t have split ends so if I look after it I can get away with a whole year at least without it being touched. But lols on the faithful thing, that was definitely my case in China, finding someone who could cut western hair and didn’t charge the moon was a challenge!

    • Know IdeaMEMBER

      I did it solo once, although only after all immediate family members refused to assist. Funnily enough, the ensuing “haircut” had me with many offers to help out the next time around.

    • I had my haircut in Dec 2019 and was a bit hesitant to visit a barber with covid around, but finally got another haircut in July 2020. One way of saving money.

    • desmodromicMEMBER

      Yep, purchased clippers 25 years ago to do young son and then attempted No.1 all-over on self. Perfected the technique and have since saved unknown number of $20 visits to the barber. Original clippers cost $50 and still going.

  4. yep My mother cut my hair till I was 20 and then I met my wife, shes been cutting it for the last 20 odd years 😂..Ive only been to a barber 3 times in 45 years … Id love to say Ive invested my savings wisely..but no..been lashed up against a wall 🙈🍻

    • Narapoia451MEMBER

      Was thinking about it but still gun shy after the pummeling on the way up in this bubble. (which you did warm me about to be fair)

      Psyching myself up to take the leap.

    • Just getting my head straight on that – so the price today is about as low as it has been for the last year – so everyone ,i.e.sentiment, is optimistic that the market is stable to up ?

  5. F., You can’t have our massive intl trade volumes (and CAS) without floating exchange rates. Fixed rates invite big players to bet against them (Soros etc).

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