Australian dollar sinks as inflation panic builds

See the latest Australian dollar analysis here:

Macro Morning

DXY was up and away last night:

That was enough to sit on the Australian dollar:

The AUD is much stronger than EMFX:

Gold is breaking down as oil surges:

DXY alos sat on base metals:

Big miners eased:

Runaway EM stocks too:

Happy days in high risk ville:

US yields eased:

But stocks still don’t like the bond back-up:

It is looking increasingly possible that the US dollar has put in a medium-term bottom. US stimulus is much more powerful than elsewhere. Its vaccine rollout is better as well. And its recovery is set to be very powerful. Its inflation pulse is also much stronger and headed for a spike

A lot of this inflation is temporary. Virus-related supply-side blockages, the orientation of spending to goods plus the inventory restocking cycle is driving it. All will begin to come off in H2 as economies reopen and China moves to tighten. I will add that the Biden Administration shows no sign of lifting the Chinese tariffs, a key driver of the last DXY bull market.

But, for now, we need to add rising US yields to the picture and this no longer adds up to a weak DXY.

For the Australian dollar this is mixed news. The inflation pulse will probably keep markets interested in commodity hedges, that is if the BTC bubble doesn’t steal the lot, as it appears to have done to gold.

But a rising DXY takes care of a lot of that US inflation anyway and it is always a headwind for both EMs and commodities so we may be near a peak there as well, especially in iron ore.

I can see a scenario here in which the Australian dollar is effectively topped out:

  • US growth, inflation and yields are all materially higher than Europe and EUR rolls.
  • China’s export boom continues on the back of developed economy recovery and it keeps tightening and slowing sharply into 2022.
  • Both monetary and fundamental demand drivers for commodities go bust despite inflation hedging.
  • Australian yields are still rising with the US but a softening China means the RBA moves to an Operation Twist and sits on the long end before the Fed does.

Don’t get me wrong. I still think inflation will fade in H2, and that might provide the AUD with another round of reflation, but not if China tightens and slows into 2022.

David Llewellyn-Smith
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Comments

  1. Stanley Drukenmillar said we will see 3/4% inflation

    DLS it might be worth posting Stanley’s 20 minute interview with GOLDMAN SACHS I think was last week

    It’s on the internet

    I think everyone will find in interesting what his positions are

  2. We have all seen this movie before.
    When Trump implemented his tax cuts around 2017/2018, many commentators/economists were forecasting a stronger economy, inflation and rising bond yields.
    Yields did rise, but it wasn’t long before they retreated.
    Biden’s massive stimulus is simply the same story, but in bigger amounts.
    As a results, we will get the same outcome: yields rising initially for a couple of quarters before falling back.
    Inflation is not going to be a problem with fiscal stimulus.

  3. pfh007.comMEMBER

    While the western middle classes don’t care two hoots about the serfs that provide their consumption goods and services there is a risk that Xi Jinping will pull a few stunts that will make it very hard for the western apologists to ignore.

    A despotism tariff, quotas or outright blocks on Chinese exports might be on the menu if enough people demand them.

    Since when was anyone obliged to trade freely with authoritarian police states.

    And yes, we know that [insert Anglo /western country of your choice] are just as bad as the CCP but it doesn’t matter as western propaganda is first rate and that may be what we are talking about.

  4. People like to talk about BTC eating gold’s lunch, but my model of gold shows no sign of changes or residuals in the past year. Gold is where it should be given the USD, real yields and volatility.

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