Australian dollar capitulation begins

Capitulation by Australian dollar analysts that is. Last night the US dollar poured on the heat as it powered higher on its emerging growth, inflation and yield exceptionalism:

The new pain trade is higher DXY

The Australian dollar is sitting right on the partially broken neckline of its monstrous head-and-shoulders top:

AUD at the cliff

The newsflow was roughly unchanged with Europe falling back into the pandemic and the US lifting out of it. The Fed remains unconcerned about yields, the recent stimulus package landed on households and discussion around the next one is beginning.

Analysts are shocked by the turn of events. Westpac is one:

The scale of the Aussie’s decline over the week seems large relative to the wobbles in equities and commodities. The S&P 500 is around 2 week lows, the Bloomberg Commodity Index bounced off 6 week lows but AUD/USD is barely above fresh lows since December, about-2% on the week.

• Some of the weakness may be collateral damage from NZD which was softest in the G10 (see p6). Otherwise, the A$ slide is probably due mostly to its role as a high beta alternative to the US$, with DXY breaking into higher ranges this week.

• The domestic data calendar was very quiet and news on Covid restrictions was positive, with NSW and VIC implementing further loosening. Next week however, JobKeeper expires, with many watching for the impact on employment. As the chart shows, workers on zero hours are still >50K above pre-pandemic levels but the total layoffs are likely to be larger.

• AUD/USD is at an important juncture, with no significant support between 0.7564 (2 Feb low) and the 200dma around 0.7370/75. But if DXY pauses, A$should be able to build a base around 0.7600. Our end-Q2 target remains 0.7900.

In my view, only a Fed move to yield curve control or Operation Twist can deliver that upside target and that is not in the offing for now. Embrace the pain!

JPM has:

That the Euro couldn’t bounce yesterday after blockbuster PMIs reinforces the flow dynamic in the FX market right now, which is a need to buy USDs. In particular, RMUSD demand remains large and unrelenting but the recent change in the flow dynamic has seen a significant pickup in US corp demand for the greenback this week, which feels month/quarter end related to me. In the past couple of months G10 FX has been frustrating, largely because rationalising the moves against yields/equities/previous correlations has been a futile exercise. So for now, when the FX flow picture is a lot cleaner so my plan is just to remain long USDs for at least the next week or so vs EUR, GBP, CAD, NZD. CAD is a lower conviction, going against positioning view as the fundamentals are good in Canada as the Boc will be one of the first G10 CBs to head down the path of normalisation and growth in Canada will get a massive tailwind from US growth. In NZD, the market is long, the rates market prices too early normalisation of rates and the economic fundamentals are worsening. Also bearish on AUD, but it feels like positioning is a lot cleaner there.

This is not about flows. It is about US growth, inflation and yield exceptionalism as China slows. This is the opposite recovery pattern to the two previous business cycles. EUR is a China proxy.

As Danske Bank notes, the DXY rally is broadening:

Dollar is strengthening versus most crosses and EUR/USD was little different yesterday as we hit a 2021 low of 1.1810. A few weeks ago, the dollar turn around was mostly visible by the lack of a firm downtrend in USD/CNH and slightly weak Asian stock markets. Now, however, it’s stronger dollar rersus EUR, Scandies, commodity currencies and high beta EM alike.

Yep, and get this, via NBC:

Sen. Joe Manchin said Wednesday that he favors a large infrastructure package that would be paid for in part by raising tax revenues — a point of contention between the two parties.

“I’m sure of one thing: It’s going to be enormous,” the West Virginia Democrat, who is seen as a swing vote in a chamber divided 50-50, told reporters at the Capitol.

Forget the Fed. Don’t fight the Treasury!

The base case ahead is a materially lower Australian dollar as US growth exceptionalism enables a return to Chinese structural reform and iron ore capitulates next.