Australian dollar rockets on renewed US virus shock

The Australian dollar made up for lost time versus broader risk Friday night:

The trigger was bad news being good news in US jobs following the virus third wave:

The unemployment rate fell by 0.4 percentage point to 6.3 percent in January, while nonfarm payroll employment changed little (+49,000), the U.S. Bureau of Labor Statistics reported today. The labor market continued to reflect the impact of the coronavirus (COVID-19) pandemic and efforts to contain it. In January, notable job gains in professional and business services and in both public and private education were offset by losses in leisure and hospitality, in retail trade, in health care, and in transportation and warehousing.

…The change in total nonfarm payroll employment for November was revised down by 72,000, from +336,000 to +264,000, and the change for December was revised down by 87,000, from -140,000 to -227,000. With these revisions, employment in November and December combined was 159,000 lower than previously reported.

With the revisions that is a very weak report. Shadow slack ensures a long tail to labour weakness:

Strong job gains are likely from mid-year as the virus is licked but the Fed will be in no hurry to tighten.

The weakness gave new impetus to DXY bears so the AUD jumped. But, the short position on the USD remains very large and a headwind for further falls. Via Goldman:

In the week ending February 2, non-commercial traders net purchased $4.1bn USD, following net purchases of $0.6bn USD in the previous week. Asset managersappear to have driven the net inflow into Dollars, while leveraged funds net soldUSD. Non-commercial traders mainly net sold EUR, along with smaller amounts of AUD, NZD, JPY, and BRL. They also net purchased CHF, CAD, GBP, and MXN. Asset managers net purchased $4.6bn USD, and primarily reduced JPY and EUR net longs. They also net sold small amounts of CAD, GBP, AUD, NZD, CHF, and BRL. Leveraged funds resumed net sales of USD, against net purchases of CHF, CAD, JPY, and AUD. They were also net sellers of EUR, GBP, NZD, and BRL.

USD: Sticking with shorts as global rebound dominates regionaldifferentiation.The January rebound in the US Dollar extended over the pastweek, but the mix of performance shifted, with the Dollar weaker againsthigh-beta EM currencies (BRL, MXN, ZAR) but stronger against traditionalreserve currencies (CHF, EUR, and JPY). Given the pattern, we suspect that theUSD rally against the majors reflects a combination of reducedreserve recyclingand some active positioning for “US outperformance” due to fiscal policy newsand a relatively successful US vaccine rollout. The tactical outlook for the Dollarlooks mixed and may depend on fiscal policy developments. On the one hand,managed future/CTA investors still appear short USD, and both EUR and JPY areclose to important moving average levels; additional USD short covering by thiscommunity could weigh on G10 crosses. On the other hand, Friday’sweaker-than-expected employment report underscored that the US is notimmune to covid-related drags on activity, and it should keep Fed communicationrelatively cautious over the short-term. In addition, EM central banks still seemto be intervening at high levels, based on the Fed’s custody data (seeChart ofthe Week). Therefore, the reserve recycling activity that seemed to support G10currencies in Q4 could return at some point. For investors looking to position forsustained “US outperformance” alongside strong global growth, ourquantitativeworksuggests the best expressions include short USD/MXN, short USD/INR,and short EUR vs G10 commodity currencies.

Despite the Dollar rally to start 2021 we are not inclined to change our bearishmedium-term forecasts. First, the economic outlook primarily features asynchronized global rebound, not regional divergence. Every country in the worldis dealing with the same challenge—controlling covid while supporting theeconomy—and all will rebound as vaccination allows a reopening of high-touchindustries. Until the vaccination process progresses further, we favor positioningfor a broad global recovery through USD shorts rather than variation in near-termgrowth prospects through non-USD crosses. Second, further steepening of theUS yield curve should not have major implications for most currencies (althoughJPY may be an exception). Front-end rate differentialsmatter much moreforcurrency markets, and the Fed has made a credible commitment to keep policyrates at zero until inflation picks up. Third, we still think the starting point matters: the Dollar is highly valued andhighly positionedafter a long stretch of US economicand asset market outperformance, suggesting greater downside than upside forDollar crosses. We therefore stay short USD vs CAD and AUD in G10, vs a basket ofcrosses in EM, and vs CNY (via unhedged CGBs).

Interesting that the flush out of risk owing to flashmobs did little to reduce the DXY short. Oddly, AUD longs are still neutral which does give the local currency room to rise. I still see another leg up for the AUD through H1 into the low-80s then a peak in H2 and decline in 2022 as China slows rapidly.