Australian dollar crashes as Ardern pops housing bubble

See the latest Australian dollar analysis here:

Macro Afternoon

For many years, far more than I would ever have thought possible when the MB journey began, we have campaigned for a simple change in philosophy among Australian policymakers. It was that we should shift away from house prices as the key macro determinant and move back to an older wisdom that promoted economic competitiveness and, especially, a lower currency as better drivers of growth.

We’ve had mixed success over the years but yesterday, in New Zealand, the penny finally dropped as the Ardern Government delivered an epochal change in New Zealand’s insanely property-friendly property laws. The result for the Kiwi dollar was spectacular:

NZ dollar bungy cord snaps

NZ dollar bungy cord snaps

It was aided by what is now looking very much like a new US dollar bull market:

US dollar in a new bull phase

US dollar in a new bull phase

The Australian dollar was smashed against all DMs and was weak against EMs as well. Against DXY, it is now a hair from completing a broken neckline in a monstrously bearish double-top:

AUD bull gone bust

AUD bull gone bust

Oil was smashed again. Gold rolled:

Oil in troubled waters

Oil in troubled waters

Base metals followed as the supercycle evaporated:

Base metals slide

Base metals slide

Big miners are blowing up:

Not so stronger for longer

Not so stronger for longer

EM stocks have one foot stepped off the cliff:

Sell EM

Sell EM

But, alarmingly for those looking to a Fed stick save, junk spreads are fine:

Hugh yield debt no stress

High yield debt no stress

Yields were doubled-pumped by oil and dovish Fed rhetoric:

Bond back-up reverses

Bond back-up reverses

Stocks fell but were not too bad, drawing support from easing yields:

Stock correction OK

Stock correction OK

Westpac has the event wrap:

US new home sales in Feb. fell 18.2%, more than expected, to 775k (est. 870k) from a revised 948k in Jan. (initially 923k). While there are growing concerns over rising mortgage rates affecting affordability, the sharpness of the decline was attributed to extreme cold weather from February’s polar vortex (the Mid-West fell 37.5% – the largest drop in 27 years). The Richmond Fed manufacturing survey index rose to 17 (est. 16, prior 14). The gain was led by shipments (to 22 from 12), with new orders (10) and employment (22) unchanged at elevated levels, and expectations also remaining strong in most areas.

Dallas Fed’s Kaplan (non-voter) indicated his hawkish bias by saying that he was one of the Fed officials signalling a hike in 2022 in the dot plot projections. He expects 6% growth in 2021, unemployment at 4%, inflation between 2.25% and 2.5%, and 10yr yields between 1.75% and 2.00%.

Bank of Canada Dep. Gov. Gravelle gave a speech to in which he outlined their “plans to suspend or discontinue several facilities and programs” introduced during the pandemic. He described potential for balance sheet developments that “my Governing Council colleagues and I are considering”, reiterating that they might reduce QE over time and that this will be appraised with April’s economic projections at their next meeting. He described the likely reduction of QE, when “the strength of the recovery arrives”, as lifting the foot from the accelerator as opposed to hitting the brakes. Clearly the BoC is guiding the markets towards tapering that was first alluded to in January.

Wall Street is struggling to pivot on the bashed-up Australian dollar. Citi is typical:

As outlined in NZD: Government sweeps on housing prices, policy headlines prior to the Asia open saw NZD fall towards 0.7140. Selling appears to have continued since, with spot now trading at 0.7096 (-0.9%), through the earlier March lows, and now also through the 100dMA at 0.7124. Key levels giving looks to have exacerbated NZD underperformance vs peers. The move has also triggered a push in AUDNZD to yearly highs at 1.0870 at the time of writing–the last time the cross traded around here was in October last year. Current levels mark resistance in the pair ahead of 1.0900, where the cross failed in October 2020.

As a reminder, recent mild NZD underperformance vs AUD comes despite a dovish leaning RBA and hawkish leaning RBNZ. Near term data trends instead appear to be driving relative performance with especially strong jobs data in Australia contrasting with a large Q4GDP miss in NZ last week. Nonetheless, NZD outright should derive tailwinds from higher milk prices and the consequent improvement in the terms of trade, as well as what appears to be a near term top in US yields for now.

Ahead this week we watch Australia March PMIs on Wednesday, where we expect benign trends to be confirmed, though AUD is likely to trade with broader risk considerations as opposed to this data point. New Zealand trade data for February is scheduled to be published on Wednesday as well.

God bless Jacinda Ardern is all I can say. ING is another:

NZD: Ardern’s housing move cools off hawkish RBNZ expectations NZD was the worst performer in G10 during the Asian session after NZPM Ardern announced the removal of some tax incentives for real estate investors (which account for around 40% of house purchases in NZ) in order to curb the housing bubble. This is likely taking some weight off the RBNZ to address the housing situation and therefore leaving the possibility of keeping rates lower for longer. The one-year OIS rate dropped by9bps to 0.31%, as markets now see a rate hike as less likely. In our view, other factors (like resilience in employment and inflation) may continue to argue in favour of a hawkish shift by the RBNZ later in 2021, and we don’t expect markets to continue pricing out rate hikes just yet. For now, NZD may see limited further downside.

Are they serious? NZ housing is going to pop. The NZD is going to crash. There is no RBNZ rate hike coming ever again. This will spill over to the AUD.

The Australian dollar head and shoulders top is not yet complete. But if it does break 0.76 decisively then expect a steep sell-off.

DXY is on the march as US vaccine, growth, inflation and yield leadership is here, exacerbated last night by a new German lockdown. Increasing market volatility will drive another DXY bid. Ahead is still more inflation. MOAR Biden stimulus. And a slowing China with tumbling iron ore.

Hang on to your hats, we are about to discover if a busting market cycle can derail a broader booming economic cycle and the Australian dollar, as usual, will be the volatility litmus test.

David Llewellyn-Smith


  1. New Zealand’s housing debacle: The governments panicked, slapdash and incoherent response to collapsing polling support for Prime Minister Ardern …

    … The focus needs to be on land supply and infrastructure debt financing, to allow increasingly affordable new housing supply for both owners and renters …

    … Better to build out of the bubble (as the Australians are doing … refer FURTHER UPDATE front page ) rather than bust out of it, as the panicked (lack of real – world experienced led) New Zealand government appears hell – bent on doing …

    Anger over Government moves against property investors … Miriam Bell … Stuff New Zealand

    Removing tax deductions on interest costs for rental properties is “outrageous” and will have a negative impact on the rental market, property investors say. … read more via hyperlink above …

    … The polls punishing the government …

    … New Zealand TV One Colmar Brunton poll: Slumping support for Prime Minister Jacinda Ardern …

    … 35% (don’t knows and no preference combined) had no choice for preferred Prime Minister …

    Labour keeps strong lead as Collins plunges further in first 1 NEWS-Colmar Brunton poll of 2021 … TVNZ

    Ipsos NZ Issues Monitor February 2021

    Latest Stickybeak Issues Poll … Toby Manhire … Spinoff

    … extract …

    Housing (note graph within article … just 13% not concerned)

    If there is a shadow that looms over brighter-than-expected economic news, however, it is unquestionably the housing market, where prices continue their vertiginous rise. Fifty-six per cent of people said they were very concerned about housing affordability, while only 13% said they were not at all concerned about the issue.

  2. AUST & US 10 year yield looks they both have big falls ahead ……market is still extremely short bonds betting on higher yields……oil will help ease inflationary fears for the moment
    We could see 1.2% or lower on both 10 year yields over next couple of months
    Looks like there will be a big short squeeze in US 10 year bonds on the horizon

    Don’t think market is expecting this move much lower in bond yields

  3. What I will say above

    You posted a reason for changes in mortgages are from the POLAR VORTEX …… very interesting …….

    If anyone would like to know a little more about PVO polar vortex oscillation and SC sunspot cycle I’m happy to show you some analysis

    Study of the Influences of the 11-yr Sunspot Cycle and Polar Vortex Oscillation on Observed Winter Temperature Variations……..

    Don’t take my word. Westpac noted the affect of PVO

  4. SoCalSurfCreeperMEMBER

    AUD/USD fall was short and steep.

    Punter forecasts for AUD/USD at 30 June and 31 December 2021?

    My tea leaves say 0.75 and 0.73 with downside.

    • US 10 year now at 1.61%

      Market is extreme short bonds …..if we get into 1.50s, I think short covering but big stop losses under 1.50%
      If we see 1.50% break it could get ugly

      If we do see AUSSIE bond yields lower, I think we will see the banks cut fixed rates again

      Wouldn’t surprise me

      Re AUD, you know I’m the bear of bears…..but I’m not sure the equity sell off will continue……I think we could go much higher in equities from here and that’ll drag the AUD up to 85 to 90c over next few months

      I’m not trying to be against the consensus view for just the sake here, if equities up think AUD too, but I understand AUD looks weak

      Not sure USD has bottomed……think we are at important points here ……on AUD and US equities

      Very confident on bond yields AUD and equities i am not so sure

  5. Doesnt that mean NZ will inherit a Labor Force… and a young Population?

    So in the short term, you’ll see a popping housing market but over the long term, you’ll see young people abandoning Australia for a place with a better ‘Quality of Life’ like NZ?

    So eventually, Australia will inherit Labor Shortages and end up a bunch of Grumpy Boomers nobody cares about… as all the young shift to a country that treats its workers with respect?

    Does that mean Australia will end up an imploding debt barren wasteland filled with Grumpy Whinging Boomers while all the Young Energy and Education goes to where it will be happier? lol

    Too bad for Australia, I guess.

    What will the Boomers do now?

    Its nice to see Sydney in flood. I hope the fcking place drowns. More rain ;p Nobody cares about Sydney. Other then Kings Cross, what has it ever done for Australia?

  6. Copy recent article …

    How much more of this idiocy is the public expected to tolerate ? …

    Housing crisis: Emergency motel stays averaging three months, some tenants stuck there for over a year … Jenna Lynch … Newshub

    … extracts …

    … Figures released exclusively to Newshub show in the three months to December last year, 1002 households had been living in motels for three to six months, a further 672 had been there for six to 12 months, and 120 have been living in emergency accommodation longer than a year.

    … Information obtained by Newshub shows the Government has spent an average of $366 a night housing people at the motel Stanley and her family is living at. Add that up every night over a year and it’s a total of more than $130,000, enough for a deposit on a house. … VIEW & READ MORE via hyperlink above …

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