Insane RBA drives Australian dollar mad

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was thumped last night as EUR surges:

But it couldn’t touch the Australian dollar which went mad:

Not so much against EMs:

Gold launched as well:

And oil:

Dirt a little:

Miners were soft:

EMs stocks gapped:

Junk too:

Bonds are stone dead:

Stocks were mixed:

The only chart that matters took off again thanks to a spectacularly inept Phil Lowe. Unbelievably, the last time this index threatened to break down in early June the RBA boosted as well:

It is beyond my words to convey how stupid this is. Most assuredly, last night’s forex action was in part driven by this:

EU leaders have struck a deal on a landmark coronavirus recovery package that will involve the European Commission undertaking massive borrowing on the capital markets for the first time.

After days of sometimes bitter debate, the bloc’s heads of government agreed on a €750bn package aimed at funding post-pandemic relief efforts across the EU. The deal was announced in a tweet from Charles Michel, the European Council president, at 05.31am (CET) on Tuesday and was hailed by Emmanuel Macron, the French president, as a “historic day for Europe”.

The recovery fund centres on a €390bn programme of grants to economically weakened member states — a significantly smaller sum than the €500bn package originally proposed by Berlin and Paris in May. Leaders also signed off on the EU’s next seven-year budget, which will be worth €1.074tn.

The deal is decent if not earth-shattering at 4% of GDP over years but it’s the symbolism that matters. The Euro is safe for now so is bid as its better virus performance comes to bear:

Even so, EUR only rose 0.74 versus DXY whereas the AUD did double that. Why? Because a staggeringly stupid RBA threw its hands up yesterday on any and all monetary policy innovation, removing all blocks to a higher Australian dollar.

So long as the fakeflation now runs, and DXY keeps falling, commodity prices will rise and the RBA has guaranteed every forex speculator in the world that it will do whatever it takes to support their deflationary bid under the AUD.

David Llewellyn-Smith

Comments

  1. For every cent the AUD changes is a billion in lost/gained revenue. As you keep saying, over and over and over again – who else is China going to buy Iron Ore from ? Exactly. So why sell it cheap ?

    One day that nexus will be understood. Lowering the dollar to improve competitiveness and increase exports of – what fridges ? Fletcher Jones clothes ? Washing machines ? Cars ?

    • DominicMEMBER

      Surely if you ‘lower the AUD’ you decrease the number of fridges and clothes bought? Less purchasing power, less goods, no?

      When the AUD surged against the USD in 2012/2013 (buying 1.08 USD at one point), the amount of personal imports from abroad surged too, to reflect the enhanced purchasing power of strayan citizens.

      Competitively devaluing the domestic currency may increase the revenues of exporters but it makes the rest of us poorer. The argument for competitive devaluations is that it puts a gloss on the national accounts — but it’s fake and it’s why I’ve always argued that GDP should be published in both the local currency and USDs (the very same logic that argues for the publishing of GDP per capita)

          • Manufacturing is the thing Santos etc are inadvertently doing a great job of snuffing out of existence, by selling all our cheapest gas to Asia and selling the 300% more expensive gas to our domestic manufacturers.

        • DominicMEMBER

          Sorry Arthur, but destroying the currency is never going to entice manufacturing back here — given that currencies are not stable anyway, why would any business take the risk of setting up here? Forget the currency nonsense – it’s a red herring.

          Ironically, this country’s best hope of seeing a resurgence in manufacturing rests with a return to a gold standard — that way, currency fluctuations would be mild at worst and as long as the Govt were fairly stable that would be enough to encourage manufacturers too.

    • Rasputin, IO price is set by global financial markets and derivatives. Not by the Aussie producers.

      It’s not as if RIO can just mark up their price tomorrow like it’s a Woolies store.

  2. migtronixMEMBER

    Didn’t they announce the biggest budget deficit since ever, like, yesterday? Isn’t that exactly what the “automatic stabiliser” is supposed to respond to? In the opposite way

    • DominicMEMBER

      There are two types of inflation:
      1. The contrived CPI (which is presumably what Lacy is on about)
      2. Money supply expansion (which is currently occurring at warp speed)

      The output gap will not even be a factor in ensuring that CPI starts to fly next year – the MS expansion will see to that.

        • Jim's Central Banking

          Stimulus did hit the real economy this time. I doubt it will be enough to cause an inflation breakout, but it should be visible when the data arrives.

          • I assumed Dominic was referring to QE not the fiscal. Regardless I doubt even the fiscal, while large, will show up. All it did was fill the spending hole created by COVID – didn’t materially add to spending, and certainly not enough to close the output gap

        • DominicMEMBER

          No problem Robert – we’ll have a friendly bet:

          This time next year, inflation will be a serious issue. That’s my position.

          You’re right, QE generally trickles slowly into the economy via financial assets but JK, JS and the various other schemes are direct injections. These schemes have just been extended for another 6 months and will probably be extended again as the economy slides inexorably into the abyss. The money supply has to increase and this country’s extraordinary debts need to be inflated away – it simply has to happen. There are no other options.

        • Doubt it’ll be so bad or so good. AUD will probably kick along at 75c and the median in big cities might fall 10-50K.
          Might not even.

          You will not find pages of people that bet the other way, they stopped reading years ago.

      • Crash! Not a bust or a melt but a crash! They are strong words! Define an Australian house price crash in nominal percentage terms. Just so you don’t go back on your words in the future and delete comments calling you out on it, like you have in the past.

      • genuinely asking because I don’t know. How has big increases in M2 USD affected property prices in Oz in the past? I know that liquidity doesn’t fix unemployment and insolvencies but I’m just trying to put it all together. Is it just equities that will go up?

    • Somewhat depends on whether we go down with the US or not, Dominic. Stock prices up, gold up, silver up. One viewpoint is that is what happens when the US $ starts its inexorable fall into failed state currency. Just too many black swans on horizon for our poor cousins.

      And, the vault has been stripped bare. Those that emerge from the carnage will find very little left to kick start their economy.

      My fear is that we’ll be next – too much apathy, anger and selfishness in this place now. Australians are not the nicest people and it’s changed for the worse over the 45 years I’ve been here. The current terrible crop of politicians actually reflect us and how far our levels of empathy, compassion and care for one another have fallen

      • DominicMEMBER

        The central premise for a strengthening AUD is a commodities bull market — the link between the two is undeniable.

        I don’t think it’s fully appreciated round these parts but commodities have rarely been cheaper relative to stock prices in all of history – and things move in cycles i.e. that relationship will revert with commodities rallying hard or stock prices crashing hard to close the gap, or a combo of both. Either way, commodities are going to appreciate relative to everything else these next few years.

        Even if you smash the AUD, the impact will be substantially higher export income (FX translation), which is a boost to GDP and the trade balance. Which is AUD bullish.

        All the RBA can do realistically is trash the AUD faster than the Fed is trashing the USD, otherwise the AUD is headed north irrespective.

        I hope all the above points to the screaming obvious – gold and silver are on a one way ticket right now.

        • at the moment this narrative really looks like it’s got legs and now with breakouts occurring and US trashing the USD I can’t really see any reason not to play it. The counter argument is the historical 1929 example of insolvencies but my understanding is that the Fed tightened into the crash and delayed an increase in M2. This time it’s seems pretty clear they were ready. So if it’s going up may as well get on it until the Fed tightens it, which looks unlikely. They would probably see a bit of excessive speculation as a necessary side effect to the main goal of a turn. Only thing I thought didn’t add up was that I thought it took time for M2 to increase equities, clearly that was wrong!

          • DominicMEMBER

            “Only thing I thought didn’t add up was that I thought it took time for M2 to increase equities, clearly that was wrong!”

            That’s more a function of Wall St front-running the incoming money — there’s no point waiting, just get stuck in and buy before everyone else does.

          • DominicMEMBER

            The AUD at parity will definitely slow down the gains you make in gold (priced in AUD) but if you think that all currencies will be trashed (which they will) then gold will gain irrespective. It’s just that gold in USD will gain more. If you’re a Strayan-based holder of gold and you’d like to juice your future returns you could do so by being long AUD/USD (like an overlay trade)*.

            *All subject to the usual caveats

          • DominicMEMBER

            Undoubtedly. What’s your time line?

            You may be better off buying some good commodity stocks – more leverage that way. The AUD is likely to track the commodity rally (subject to the usual caveats)

    • BrentonMEMBER

      We don’t have the same rate differential this time around.

      I don’t see the China demand boom lasting 2 years. They seem to be having growth scares with increasing regularity as they slip into post growth. 2015-16, 2018-19, 2020, 2021-?

      Still, there’s no fighting this strength at present.

      • DominicMEMBER

        Yes, superficially the rate argument is correct but QE is mean to be a form of rate cut (every 250bn printed equals a 0.25% rate cut or something like that – can’t remember the number but if you trawl around the Fed website they’ve mentioned it plenty).

        On that basis then, as long as the Fed prints more (relatively) than the RBA, the rate differential expands (just not the official cash rate).

        • Mike Herman TroutMEMBER

          thank you for your earlier replies on housing, gold, and commodities the past few weeks. I looked with great interest at the equities/commodities ratio chart and decided to start accumulating. I listened to a good podcast with Jeremy Grantham who also thought now was a good time to buy commodities with the risk of inflation, historical lows etc… thanks again…

  3. It is clear the RBA only really cares about the banks and property. They are not interested in overall monetary conditions and they seem to consistently downplay their inflation target.

  4. robert2013MEMBER

    About a month ago I drew a line on the audusd chart going up from just before the march low. I thought aud looked to stabilise at around 0.7 and break the pattern but the action over the last couple of days means we are still tracking that line. It’s scary steep. Now I’m sell my remaining USD.

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