Australian dollar falls as America first returns

Overnight the Australian dollar fell back a little from its recent charge. In truth, it was a pretty minor setback, especially so given risk assets struggled through much of the night, wrestling with higher yields:

The battler is still in a clear uptrend as commodity currencies outperform amid the great rotation from growth to value. Technicals are strong in that regard too, via Credit Suisse:

Above .7917 on a sustained basis would expose the pivotal .7988/8000 mid-February 2018 high AUDUSD extended its gains on Monday with another surge higher,before coming to a temporary pause as expected around the March 2018 high at .7917 after briefly prodding above here this morning. Post a near-term breather, we look for further upside to unfold, in line with our bullish outlook and the very large“head and shoulders” base that is still in place. Above the aforementioned .7917 on a sustained basis would see .7934/35next, removal of which would expose the crucial mid-February2018 high and psychological barrier at .7988/8000, where we would expect to see fresh sellers at first. Beyond here though would see a move to the top end of our core medium term objective at .8136. Support moves initially to .7900, then .7856/50, beneath which would ease the immediate upside strength and see a move back to .7820–the recent breakout point–which we now expect to hold if reached. The market is pushing higher with next key resistance at.7988, ahead of the cluster at .8000/8136.

Yet, as I have been pointing out in recent days, the narrative for the other side of cross, the US dollar, has shifted. TD Securities does a good job on that:

It isn’t global synchronization. We continue to see the market narrative stuck in the evolution between competing forces. For starters, we have the global liquidity meta-theme that’s dominated the markets during theCOVID pandemic. In short, central banks have flooded the markets with excess capital, ballooning the global central bank sheet to $35 trillion. The aim was to stimulate the economy and markets, hoping growth expectations would bounce back in time. While risk assets have ripped higher in the wake, we haven’t seen global synchronized growth yet. The first chart plots our Global Growth Diffusion Index (GGDI) versus the Broad USD. GGDI uses the change (six-month delta) in consensus growth expectations (1-year ahead for both G10 and EM) to measure the pickup across the world. At 100, all the countries worldwide have been upgraded over the past six months and vice versa. There’s a clear relationship between global growth and the USD, where good global dynamics weaken the USD. It’s another way to capture the so-called smile effect. That said, we note the break in the correlation recently: USD weakness without the synchronized global uptick. GGDI has, in fact, only seen 21% of the sample upgraded over the last six months. That reveals holes in the global growth narrative, especially as the USD trades like 50-75% of the world has started to accelerate again.

Exceptional but real. The current weak USD narrative rests on the fact that this liquidity trade should persist, reflecting the excess USDs in the global financial system. Real rates and term premium remain low, cross-currency USD correlations remain elevated, risk assets run higher while the USD falls. Our view rests on the shift to a new narrative, one that offers a more nuanced USD picture: lower cross-currency USD correlations, more focus on regional growth dynamics, and higher, though still low, levels of real rates and term premiums. The market has referred to the emerging new narrative as USD exceptionalism. We believe that’s partly true, where the US growth outlook appears exceptional compared to the EUR. However, it won’t be the same exceptionalism we witnessed during the Trump years. Trade wars and fiscal stimulus made the US look expectational. Yet this time around, the whole world can likely share in the recovery, though the pace and magnitude will vary. Vaccines, mobility, and base rates will determine the early winners and losers that still favor USD consolidation ahead. This transition from liquidity to growth divergence should require a positioning drawdown, reflecting the new theme’s pivot. Our broad USD positioning index still holds a 1-sigma short. Equally important, markets have started to get more excited about central bank exit and rate moves. Year-to-date, the US10y rate has jumped around 43bp, lagging behind the UK and Canada by a few basis points. As we showed a few weeks ago, the USD has started to care more about our term premium factor and still holds a modest discount. That’s a sign that markets are sniffing out something that looks broken.

Very nicely put. The AUD still has strong tailwinds. But the headwinds are growing on the USD side. This is one key reason why I do not expect a huge blow-off in the currency. The other being the looming Chinese tightening and slowdown as its exports boom via exposure to rampant US growth.