Australian dollar slammed as Joe Biden’s America First takes shape

See the latest Australian dollar analysis here:

Australian dollar climbs with global stock surge

The Australian dollar was hit again on Friday night as the US dollar rallied with higher yields and commodities rolled over with tech stocks and emerging markets. All very typical market action. To the charts!

DXY was up again as EUR eased:

DXY forming new uptrend

DXY forming new uptrend

The Australian dollar dropped against DXY and other developed markets:

Australian dollar peaked

Australian dollar head and shoulders top forming?

Brent was soft and gold firm. Some are calling the bottom for the latter. They are wrong, in my view:

Gold ready to puke lower?

Gold ready to puke lower?

Base metals were hit but copper lifted:

Dr Copper in fashion

Dr Copper in fashion

Big miner charts look fine but I am increasingly concerned by action in the iron ore market:

Big miners still digging

Big miners still digging it

EM stocks gapped lower. This chart gives inspires fear:

EM off the cliff?

EM off the cliff?

Junk is threatening to trend lower:

The Fed barometer

The Fed barometer

The US curve steepened notably as the long end got belted:

Pricing higher inflation for longer

Pricing higher inflation for longer

Stocks struggled manfully against the outgoing yield tide but tech was dragged under and is gasping for air:

Yields up = tech down

Yields up = tech down

There was not a huge amount of news to drive yields higher. But there doesn’t need to be. More US stimulus is coming in the form of a giant infrastructure package from $2-4tr over 4-10 years. This will give the US an unbeatable growth, yield and inflation edge over the entire business cycle. I would ignore the day-to-day politics of it. This is what it is all about now, at 538:

If their approach to the COVID-19 relief bill is any guide, it looks like Biden and his aides aren’t exactly abandoning the president’s unity rhetoric from his inaugural speech — they’re just not willing to sacrifice legislative goals in chase of it. Instead, the Biden team is pursuing unity by performing the rituals of bipartisanship — holding regular meetings with congressional Republicans and being polite to them — and by pursuing legislation that is popular with a substantial number of Republicans voters (and continually emphasizing that point). Polls, for example, showed a big chunk of Republican voters backed the stimulus proposal.

But will major Biden initiatives get passed with lots of Republican votes? That seems very, very unlikely at this point. Congressional Democrats are already discussing using the reconciliation process again — that’s how this stimulus package was enacted — to pass an infrastructure bill. By using reconciliation, Democrats can bypass the Senate filibuster and pass legislation without any GOP votes.

Yep. Republican blockades have dealt the party out of negotiations completely. It’s all fake bipartisanship now. This means the next Biden spending package will be every bit as huge as it sets out to be as Republicans are outflanked.

BofA’s Michael Hartnett muses on the outcomes:

Theme 1…Inflation: we believe 2020 marked secular low point for inflation & rates; secular drivers…new central bank mandates, excess fiscal stimulus including UBI, less globalization, fading deflation from disruption, demographics, debt; cyclical drivers: reopening, vaccine & policy stimulus; big outperformance of inflationary Russell vs deflationary Nasdaq a harbinger; NDX topping vs SPX = thematic confirmation.

Theme 2…Supply: …either bond yields will rise, or US dollar will fall to fund fiscal excess; US debt sustainability to cause higher volatility when higher yields combine with lower US dollar.

Theme 3…Tightening: rate cuts in 2021 = 4; rate hikes in 2021…commodity-push inflation in BRIC economies means easing over (China)…big central banks clearly nowhere close to tightening but QE/YCC in G7 no longer pushing rates/spreads/vol lower; financial conditions well past“peak easy”…oil/yields/US$ up; interest rates & volatility no longer anchored.

Theme 4…Defensives: past 6 months +100bps yields have retarded credit/tech/EM upside; but cyclical rotation in banks/energy/smallcap has worked like a beauty; awfully early I know but…a. utilities + staples now 9% of S&P500, close to 30-year low; b. if macro boom consensus correct then yields up another 50-100bps = higher volatility = defensives good market hedge in H1…

The US dollar period of weakness for this cycle is already over. US yields have further to rise. The tech bubble deflation has just begun. EMs and commodities will get hit as well as DXY sucks the life from reflation, made all the more intense by Chinese tightening.

Joe Biden’s American First is here. It’s big. It’s deglobalised. It’s Main St not Wall St. It’s inflationary. It’s going to land on the Australian dollar just like the Trumpian version did.

David Llewellyn-Smith
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  1. So are they going to drink our milkshake? Will there be another eurodollar driven liquidity event? Where are you Brent? I’m pretty sure you read this site given your recent reference to it on Twitter..

    • I relucatantly changed all my USD to AUD in Jan because I was buying a house. You can bet the top is in for the USD and that me patiently waiting over 4 years to change my money was a waste of time. I did think Brent would right until I started getting doubts late last year. Ergh I never win on fx

      • I feel your pain Popcod – I am about to do the same with my USD for the same reason. And what makes it worse is that we are buying into one of the most ridiculously overpriced asset markets on the globe, at a time when prices are on tear again. Enough to make a grown bear cry. Lots.

        • I’m trying not to think about it too much. I had to sell all my gold at the Perth Mint (but I’m about to buy a little bit back as the house I ended up buying was significantly less than I had budgeted on). And I sold a lot of the shares I’d patiently built up into what I hoped was going to be an explosive portfolio (it do that to the upside but some shares I was selling years before I intended) however I’ve got a house with a negligible mortgage and the USD is now 1 year’s living expenses so I have time to settle into my regional move and find work. I’m not complaining too loudly, just ruing the fact I ended up transacting at a bad time in the cycle which I spent so much time researching etc in order to avoid doing exactly that. BUT I got a house! And it’s a good one, and you can’t get everything right so no complaints, I’m just determined to learn from it.

          • I did same as you. Bought Perth Mint gold and silver (and bitcoin) to cover potential runaway stagflation. aud/usd short was the main bet on the deflation side. Instead what we get is a goldilocks market where everything is going to be great apparently ie high inflation, but don’t worry even higher growth. Can’t win….

    • I think we’ll get the ever higher inflation and some higher growth, but not enough to alleviate the inflation. I’ve got to admit now that I’ve sold lots of shares (and everything else) to get the house I’m kind of confused about current market conditions. Last year everything was so clear, I was just surprised by so much upside I experienced. Will there be a market crash given how fragile everything is? Are we in a crack-up boom? I’ve still got stocks to take advantage of that but I’m hesitant to put any more money in unless I can see real potential regardless of the broader market so I think I have to stay with mining explorers and completely undervalued companies in the process of commercialising new tech, so super speculative and very small bets, none of which is ideal but it worked for me last year. Also what do I do with my BTC? Should I sell later on this current stair step up? Or do I ride the next leg down and sell on the following cycle? Will governments finally move against it or are they going to be focused on China’s CBDC and will they ignore BTC (as I’ve heard one very smart person postulate)? I view BTC as speculation but ETH as a bet on the tokenised blockchain future. Oh the things to ponder in addition to inflation/deflation, stagflation/reflation. How the h3ll do I cover all possibilities?

  2. I’m interested in the role of the derivative markets in a higher IR world.

    I’m no expert but I suspect that derivative s purpose is/was to hide risk. I assume repricing the risk will require an unwind.


  3. If inflation lasts longer & maybe rises a little higher than we expect could it break something before the longer term downward pressure resumes?

    • Yeah, it’s breaking tech and bonds, and could drag stocks downwards due to the price of money increasing more than certain positions can handle.

      I frequently have my finger in the hedge trigger, and have already executed hedge trades a number of times, and expect I will be doing it a fair bit during this part of the cycle.

    • They have to get the banks to lend in the absence of income growth…….there is plenty of room for that to happen especially with the Infrastructure scheme upcoming .JPM’s loan/deposit ratio is now around 50%. Banks are just arguing about the favours they get for doing so.

      These bond price movements are getting close to the 1994 rout but the difference is the coupons for the new issues, which are remaining miniscule………in other words these are trading bonds, not bonds to be bought for income. Collateral for all those bad debts in suspended animation in the repo system……that is why the stress is showing up there.