Australian dollar in the K-shaped recovery

See the latest Australian dollar analysis here:

Macro Afternoon

DXY continued its bouncing trend lower last night:

Australian dollar was weak:

Gold too:

Indeed, all commodities:

Miners were soft:

And EM stocks:

Junk has plateaued:

Yields were bid:

Stocks are Icarus:

Westpac has the wrap:

Event Wrap

US ADP private sector employment rose +428k in August, lower than the +1000k expected. ADP gains have undershot those in the more widely followed non-farm payrolls during the growth rebound. July factory orders posted a +6.4%m/m headline rise (est. +6.1%m/m), with a minor lift to durable goods from its preliminary release (ex-transport rose +2.6%m/m, vs preliminary +2.4%m/m).

Eurozone July PPI inflation was in line with expectations (-3.3%y/y) and underscored the distinct lack of inflationary pulse evident in yesterday’s weak August CPI release. German July retail sales fell 0.9%m/m (est. +0.5%m/m), although the annual pace was solid at +4.2%y/y (est. +4.1%y/y).

FOMC members Williams and Mester underscored the Fed’s recent dovish change in policy, as well as the uncertainties around growth and disinflationary risks.

BoE Governor Bailey and several MPC members gave a decidedly dovish outlook to growth and inflation risks to UK Parliament’s Treasury Select Committee.

Event Outlook

Australia: The trade surplus is expected to narrow in July as export growth moderates and imports rebound off their lows (prior: $8.2bn, market f/c: $5.35bn, Westpac: 5.4%).

NZ: ANZ commodity prices will be impacted by the Covid impact on dairy prices.

China: The recovery in Caixin’s services PMI is tapering but at a robust level. (prior: 54.1, market/c: 53.9).

Eurozone: Markit’s services PMI is on solid ground but may be impacted by the repositioning of travel restrictions. Consumer spending appetite has returned in Europe, as reflected by another positive retail sales read of 1.0% in July (prior: 5.7%).

UK: The recovery in Markit’s services PMI is well underway, with August’s 60.1 materially above the expansionary threshold of 50.

USInitial jobless claims are expected to keep trending lower from 1006k last fortnight to 950k last week. The trade deficit is set to widen in July from -$50.7bn to -$58.0bn as imports outpace exports. The August ISM services PMI will contribute positively to the recovery narrative (prior: 58.1, market f/c: 57.0). The FOMC’s Evans will speak (02:30AEST).

The Australian dollar is still torn between Fed fakeflation driving it up and extreme marketing positioning in the short-DXY, long EUR-trade. I still see DXY grinding lower as this works itself ou, at least or until volatility returns in earnest.

On that question we turned to the “K”, via JPM:

Exactly which convergence will it be? If it is the strong tech and cyclicals catch-up then I see DXY still falling and the Australian dollar rising. If it is tech selling as cyclical catch-up then I see DXY falling and the Australian dollar rising even more. If it is tech bust meeting flattened cyclicals then the safe-haven trade returns and the Australian dollar is crushed.

The probabilities are on a continuum but for ease let’s give each a one-third chance.

Meaning the most likely direction for the AUD is still up in the K-shaped recovery unless or until the RBA works it out and changes the game.

David Llewellyn-Smith
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Comments

  1. Stewie GriffinMEMBER

    Exactly which convergence will it be?

    Like income inequality has ‘converged’ over the past 30 years under any of the proposed policies.

    THIS is the only ‘convergence’ we will end up seeing under Laberals NEOliberal economic and social policies:

    The results highlighted two important cleavages: one between middle-class Asians and middle-class Westerners and one between middle-class Westerners and their richer compatriots. In both comparisons, the Western middle class was on the losing end. Middle-class Westerners saw less income growth than (comparatively poorer) Asians, providing further evidence of one of the defining dynamics of globalization

    https://www.foreignaffairs.com/articles/world/2020-08-28/world-economic-inequality

    The goal is to crush middle class Westerners living standards down to the lowest common denominator, while a moral, educated and sophisticated bunch of el!tes, acting as the administrative heads of a multicultural economic zone lord is over the top of us:

    “The Democratic Party envision America not as a nation with a proud history & a single body of citizens, but as an administrative region in which benefits are dispersed to different groups according to the political elite’s designation of their need…”

    https://spectator.us/joe-biden-republican-convention/

    And how will the proceeds of EZFKA be divided up and redistributed? Why in accordance with whaterever trendy critical race theory, like ‘white supremacy’ that can used to justify continued class and cultural warfare:

    White elites —who play an outsized role in defining racism in academia, the media, and the broader culture — instead seem to define ‘racism’ in ways that are congenial to their own preferences and priorities. [SG: com’on just say it, just say where these cultural ideas and grievance culture originate from] Rather than actually dismantling white supremacy or meaningfully empowering people of color, efforts often seem to be oriented towards consolidating social and cultural capital in the hands of the ‘good’ whites. Charges of “racism,” for instance, are primarily deployed against the political opponents of upwardly-mobile, highly-educated progressive white people. Even to the point of branding prominent black or brown dissenters as race-traitors (despite the reality that, on average, blacks and Hispanics tend to be significantly more socially conservative and religious than whites).

    https://contexts.org/blog/who-gets-to-define-whats-racist/

    The reality what is being inflicted on the West is a Cultural War as much as it is a Class War.

  2. Yeah It definitely makes sense to K swap the Aussie dollar.
    Slap a big Turbo on it and ramp the boost up to 40psi, enjoy all our JDM connections before uncle Xi tanks the Aussie.

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