Australian dollar crushed under greenback steamroller

See the latest Australian dollar analysis here:

Macro Morning

The Australian dollar was crushed by a runaway greenback steamroller last night as US economic data begins to bubble. DXY was rampant as EUR fell:

The Australian dollar was crushed back to the neckline of its head-and-shoulders topping pattern. Though it has still not broken:

Oil was hit and gold smashed:

Metals were all flattened:

Though miners did better, perhaps supported by iron ore:

EM stocks held up:

As did junk:

Despite yield piling higher:

Stocks were flat. Europe is playing catch-up as EUR falls:

The outstanding data of the night was huge leap in US consumer confidence as vaccines deliver their dividend:

Jab me and I will shop

Jab me and I will shop

So far things have gone exactly as expected as US vaccine, growth, inflation and yield exceptionalism grows. As DXY rises we might normally start to consider all three economic factors taking it on the chin. But there are two very important reasons not to do so yet. The first is this, from Bloomberg:

  • Biden infrastructure is transformative policy.
  • It will do roads and bridges but also transform the electricity grid, boost EVs and relieve housing shortages.
  • Plus it will grow research spending, education at all levels and child care.’
  • It aims to be high-tech and labour intensive.

In short, it is absolutely magnificent policy that will boost US growth to 4% for Biden’s first term, reengage wage rises for working people, and rid us Donald J. Trump.

That aside, it will also deliver the US semi-permanent growth exceptionalism as other developed economies fall behind meaning a strong greenback for years.

The second reason is that China will take this opportunity to resume its own structural reform program to slower, higher value-added and less commodity-intensive growth. This will be immensely deflationary and CNY is going to sink.

But don’t just take my word for it. Check out the US-China bond spreads:

US boom, China bust

US boom, China bust

As the US leads the cycle and China fades the cycle, delivering a strong DXY, we will see three major market impacts. First EM capital flows will reverse. To wit:

EM is a snail going under a steamroller

EM is a snail going under a steamroller

Second, gold and commodities will get hammered. To wit:

Commodity superbullshit

Commodity superbullshit

Third, small cap and dodgy tech will get slaughtered:

Tech and tiny crash

Tech and tiny crash

For forex, the risk is that these deflating market themes turn into unruly routs, forcing the Fed to ease even more, even as the US economy thunders.

I’m sure you can see why it would be hesitant to do so given the US is already heading for a very hot run-up. It is better off letting nature take its course with these bubbles and busts which will not impact the economy much.

Unless or until it changes its mind, the DXY steamroller is on the move and the AUD is going to be crushed.

David Llewellyn-Smith
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  1. If America spends big on infrastructure wont that assist Australia offset a fall in demand for our mineral resources, mainly iron ore, from China? Or will Brazil receive most of the benefit?

    • turvilleMEMBER

      Credit Suisse seems to be a complete basket case at the moment what with its exposure to Archegos and other liabilities!! Reuters said Friday’s sales were generated when the hedge fund failed to settle margin calls after the shares in CBS and Discovery and those of the Chinese groups fell last week.

      “Archegos bet on the stocks using derivatives including “total return swaps” which allow investors to receive profits on their positions without actually owning the stocks, according to one source familiar with the trades. The fund posts collateral against the securities rather than buying them outright with cash,” Reuters reported.

      “The underlying shares were held by Archegos’ prime brokers, which lent the firm money and processed its trades. They included Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura.”

      Reuters said it had been told that Archegos’ positions were highly leveraged. The firm had assets totalling around $US10 billion but held positions worth in excess of $US50 billion – no longer it seems.

      • Why do you react like this when someone has an opposing view. Why not just have no comment section.
        It’s a combination of aggressive and also offensive
        I follow so many very smart forecasters on other sites and they don’t behave like this, when someone disagrees, they welcome opposing views.

        LVO is aleays measured in his responses …..

        I write all my comments on LVOs blogs, I really like all the people on this site that’s why I came back

        The less I can interact on here the better

        Really to me those type of comments are unnecessary and verging on rude especially as your members actually pay a fee

        • That is not an opposing view from Russ. It is a trash comment designed to get a rise out of people.

          I suspect this springs from the APT article yesterday, where a bunch of people piled on because it is apparently offensive to call something a bubble based on out of control price action. Here I was thinking uncharacteristic, parabolic price action (mania) is one of the few hallmarks of a bubble pre-bust.

          • Yes I agree that Russ comment was antagonising and was unwarranted.
            I think there needs to be less aggression across the board ……

            Think opposing arguments for a rising dollar

            * market was short … it’s definitely been a short covering rally
            * move up in the dollar is unconvincing = think a break of 95 needs to be seen
            * nearly a years fall of 15% in one direction down …..we were due for a counter trend rally
            * many market plays have turned bullish here and eur longs on CFTC have fallen to their lowest levels – market really isn’t short dollars to any extreme level
            * DXY is currently moving in virtually mirrors image to equities and equities have really held up
            * market is absolute extreme short US bonds and a short covering could push US 10 year lower
            * combined lower US yields and a softening oil price might still weigh on the dollar
            * the last big rally in the dollar from the lows in 2017 around was the end of QE, (tightening USD financial conditions), tightening financial conditions tends to push the dollar up but this time fed has reiterated they will not be tightening and fiscal stimulus is easier monetary…..

            So yes the US economy is picking up steam but it feels like the move up in yields over last 6 months had factored in the US strength

            My comment was not really related to Rus in isolation just a general theme when someone disagrees

          • Anyway who cares I enjoy market discussion and friendly banter with commenters on here

            Everyone Laughs there arxe off at most things I write

            I’m not interested in that aggressive rubbish

            If you want the bait on game that’s fine, I like the calm interaction on LVO blogs

            MMM hard rock or smooth FM

          • take a chill pill everyone, no baiting, nothing nefarious, just get over it and try and enjoy it. I’ve been hammered a few times on here and I wasn’t wrong – gave the offenders a little of what they deserved (edit, this is not in reference to todays comments) and moved on, didn’t think this would be any big deal. woopidy doo.

      • wow, didn’t think my comment would elicit such a response from members as well. I will moderate in the future, 100% respect to all those doing great work that I don’t profess to be an expert in and appreciate all the reading – keep up the great work and making money. I guess the US may have been extremely clever in financing a lot of debt at low yields and then letting yields rise. Rinse repeat. Maybe that will be the secret to a long and strong USD. Until inflation becomes a trend, until the eurozone and Japan get their act together, until a strong USD hits emerging markets and yields cause an asset price correction that can’t be tolerated. Is that idiotic? Forex is dynamic of course.

          • Ha Bcnich, I’m going to go and put a bit of Marvin can’t say his last name because you get moderated but rhymes with ‘day’ on and get some Healing for the day!

  2. Perhaps US dollar bulls should consider that this rally could be short covering-based and the US needs huge monthly inflows from saver countries to finance massive current account and trade deficits. In addition the exceptionalism of tech USA could be somewhat dented if they are forced to pay tax. Honest successful small business in Australia pay effectively 50% tax and Google etc 5% if you are lucky. How can this be sustainable?

    • Douglas it’s very plausible that you are correct, there has been a very large reduction in USD shorts and really the rally has been very weak…don’t think you can yet say the USD has turned ……at this stage we are still definitely in a counter trend rally before we resume further falls in the dollar

      Think there needs to be a more convincing break out maybe 94/95 on DXY…….dollar is still rebounding we will see over next few weeks

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