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

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

The Australian dollar dropped against DXY and other developed markets:

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?

Base metals were hit but copper lifted:

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 it

EM stocks gapped lower. This chart gives inspires fear:

EM off the cliff?

Junk is threatening to trend lower:

The Fed barometer

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

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

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.