Goldman folds on Australia dollar bull market

See the latest Australian dollar analysis here:

Will Bitcoin destroy the US dollar?

Pre-Easter trading had a still strong US dollar as jobs growth accelerated dramatically. Nonetheless, the Australian dollar held at the bottom of its recent trading range around 76 cents. Then last night the US dollar swooned as oil was whacked. To the charts:

The Australian dollar held the neckline of its head-and-shoulders top again:

Oil was firm, gold stable:

Base metals were stable:

Big miners mixed:

EM stocks jumped:

Junk is fine:

US yield curves are flattening at the long-end as the belly steepens:

Stocks partied like its 1999:

The US jobs report came in very strong with 916k jobs added and a 6% unemployment rate. There is still considerable shadow slack.

That was well ahead of consensus numbers so DXY dutifully followed jobs higher. Though the AUD did not get hit.

Let’s turn to the Goldman capitulation:

USD: Closing commodity FX basket trade; eyeing expressions for European recovery. After a choppy few months we are closing our recommended USD short trade, expressed vs a basket of G10 commodity currencies (AUD, CAD,NOK, & NZD). The trade is up about 5% since inception (in early October), but roughly flat since the start of the year. Although we still expect these currencies to appreciate vs the Dollar over the coming quarters, firm US growth and rising bond yields may keep the greenback supported over the short-term. Beyond the next few weeks we think the main opportunity in G10 FX markets will be positioning for the likely recovery in European activity. Vaccinations are set to accelerate significantly in April and May, and past experience suggests current lockdowns will lower covid case numbers relatively soon. Accelerating European growth should help unwind some of the divergence with the US priced into domestic yield curves, as well as support commodity prices and risky assets generally. Therefore, despite the recent pullback, we are keeping our 3m and 12m EUR/USD forecasts unchanged at 1.21 and 1.28, respectively. Clear evidence that Europe’s covid situation is getting under control would likely warrant fresh USD short recommendations.

Hmm. If the European recovery is the next play in the Amphetamine Cycle then it’s time to get longer the Australian dollar again. Rising EUR yields will eat into the developing US yield advantage:

German yields down for the count

German yields down for the count

My own view remains that there is more upside ahead for US growth, inflation and yield exceptionalism. A few charts from Nordea tell the tale:

DXY exceptionalism not done yet
DXY exceptionalism not done yet

DXY exceptionalism not done yet

That said, I can see merit in the Goldman argument of a relative improvement in European fundamentals entering H2 as the US fiscal tail gale diminishes before the next round of infrastructure stimulus kicks in. As well, the US inflation pulse will have peaked by then, as will the catch-up growth pulse:

Runaway US growth to peak in H2?

Runaway US growth to peak in H2?

But, crucially, by then I also expect Chinese growth to be slowing as its incipient credit tightening starts to impact. Therefore, although we may see a pause or correction in the DXY bull market as Europe bounces, we should also be seeing real economic impacts hurting commodities, most notably of the bulk variety.

I remain of the view that the Australian dollar has peaked and further downside is the base case.

David Llewellyn-Smith
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Comments

  1. What I wanted to say on the weekend ……in the final stages of any bubble……markets go parabolic …..vertical …….just look at charts of the main financial bubbles throughout history gold 1980, Bitcoin 2017 South Sea Bubble….tulip bubble ….Dotcom 2000……the final stage is just straight up. I think we’ve hit that stage now……anyway don’t be surprised how fast and how far these moves can be from here.
    I don’t want to start any competition on here …..
    I can’t be bothered writing the same thing every day …….
    If this debt circus goes parabolic now…..start stocking up on food…..the higher this goes the more food you are going to need .
    This is all going to end this year …..in tears for everyone …….

    I’m going back to sleep….

    • working class hamMEMBER

      Was waiting for that piece of info you alluded to over the weekend.
      You are not wrong with what you are saying, I’m just a little hesitant in thinking this time will be the big one. I still think they have a little ammo left, enough households have enough savings to ride it out with out total collapse. Even if a 30% drop in RE prices happened now, most detached homes would still be at a level around where they were at the start of 20′.

      • I am just trying to put each piece of the puzzle together

        Think all the big players …….now are betting on a rising DXY and rising US bond yields and I think we will see the complete opposite…..

        Think USD (DXY) may crash from here into the mid low 80s…..

        I wrote last week market is extreme short bonds ……think US and AUST 10 year bond yields could fall back towards 1% from here

        Falling oil price will reduce inflation fears and clear all the short bonds …..

        Notice S&P/DOW virtually trading mirror image to DXY…….DXY has broken back under 200D moving average ….think was around 92.70

        Lower US 10 year yields will launch NASDAQ and FANGS possibly 30 % from here possibly 16,000 to 18,000 NASDAQ & possibly up towards 40,000 in the DOW and up towards 5,000 in the S&P 500

        Emerging markets and commodities to take off again with a falling DXY, Gold back through 2020 highs,,,,,BTC new highs above $70,000 USD ……..

        Falling DXY and rising commodities will push AUD back to 85c possibly 90c …..don’t have a strong view on ASX200 but you’d think we could head through 7500 towards 8,000….if AXJO follows US equities and think AUST. 10 year back towards 1% will trigger a yield play pushing our equities higher

        I believe we are going to see now a parabolic blow off that will be historical ….I may be wrong but believe the conditions now are building …..

        If this plays out for me now into mid year ……..close the curtains and switch the light off……think the crisis in H2 will be much much bigger than 2008 & 1929 put together

        And I’m not trying to just be different, it’s what I think …..and when the markets are caught betting on one side like they are now ….this could be the trigger that launches us into insanity

        One more thing,,,I want to see ……..if AUST bond yields do fall whether the banks will lower fixed rates even more this QTR…..and send Aust property even higher into Q2

        I think this could be the last vertical stage of the bubble ……the vertical stage is fast and can climb very high…..

        Anyway…..let’s see from here

      • boomengineeringMEMBER

        He’s got one thing right, personal experience dictates clawing the way up to the top of the mountain just to fall off the cliff on the other side ending up below where I started. The up the stairs down the elevator maxim rings true. Also noticed the parabolic vertical stage then as well, just not to the same extent. Don’t forget those price increases forecast by some esteemed just before the GFC collapse. It may happen earlier than bcnich predicts.
        WCHam, sentiment more powerful than savings.

        • Let’s just worry about getting up the hill before we think about the other side…..to me the higher and higher we go the worse the way down will be

          Regardless I still believe we have a major downturn in H2 ……

          I could be wrong ……boom…..it’s what I said to you a month ago.we were going to have a blow off up….I didn’t expect we would spend so long consolidating ….which can build an even stronger base to launch us even higher

          All the big names are positioned one way……if this gets triggered it’s going to be ugly

          • Dylan it’s going to be big enough.

            Anyway that’s what I think…. guess time will tell

            I’m stacking up on essentials, I’m not partaking in the fight for toilet paper if it does play out like I think it will

      • Reus's largeMEMBER

        I think this will be the monster one, debt levels are insane, aside from real negative rates, where they pay you to loan money, the debt is unsustainable, the growth of debt is far higher than the corresponding GDP it is creating so at some stage it is all going to collapse horribly as the printing that is supporting it now becomes less and less effective.

        • SoMPLSBoyMEMBER

          Agreed!
          Next ‘correction’ is bound to be a whopper. By electing to save their respective economies from the ignominy and pain of failure, central banks had no choice but to stimulate and buy time to work out plan B post the GFC.
          As they are learning, there is no viable plan B and the additonal stimmies will only create heightened vulnerability for all participants.
          Furthermore, they have been ignorant of the world outside the stadium where the money game is played. In all directions, there are multiplying threats that will add to, then overwhelm the puny capabilities of governments and central banker’s attemps to control what is proving to be certainly ‘uncontrollable’.
          https://www.bloomberg.com/news/articles/2021-03-31/there-s-a-trillion-dollar-invasions-threat-to-the-global-economy

          • Unfortunately QE and STIMMY causes inflation with feed back loops into higher interest rates
            They have painted themselves into a corner and they know it

      • I think we missed the GFC- its our turn. USA could come out of this OK as their banks have been already pumped full of QE goodness since the GFC.

  2. MathiasMEMBER

    https://gyazo.com/89373170ddd22d99d4549f6ff5e6052d

    A long time ago you’d see spikes on the MA50 / MA200 crossovers. Nowadays, it looks like ATR has become the new MA. The moment an ATR condition is triggered, your seeing big spikes ( outlined by my white line ) as the herd runs into the trade.

    Not only does this show evidence of Bots Trading ( which are everywhere in my opinion ) but also that you got a lot of ATR herds running the gambit. ATR’s the new vogue.

    There is a lot of volatility and wierd stuff going on lately. Rather then predict years out ( which Im hopeless at ), I’ve been staying tight and just trading what I see in front of me. You lose the odd trade but generally you win more then you lose.

    Its a confusing Australia we live in these days. I remember when I was at school 20 years ago, we had a lesson on ‘Trust’. I trust that the water coming out of my tap isnt poisoned. I trust that the air I breath isnt going to kill me. I trust that the people around me wont stab me in the back.

    My opinion of the Australian Government is so low, that I actually consider them the ‘Enemy of Australia’. Not only are they hopeless but they are putting Australian Lives at risk resulting in death. Im seeing a rise of Surveillance Capitalism where pretty much everything you do from walking down the street to taking a crap, your being watched, monitored and tracked. I know very little about Right Wing Extremists but Im seeing people who want to ‘Live Life’ being targeted and called Right Wing Extremists from Australias Military Forces. I mean, to put this into perspective, Australias Military is slowly but surely starting to target Australian Civilians and turning them into the enemy. Australias becoming an US and THEM state of Government and Civilians as the Corrupt Morrison Government thrusts there hate and division around the place just so they can cover there own a$$ and stay in power. The most corrupt government in Living History. Australians are dying. Nobody gives a toss. ASIO attacks Australian Civilians because they wanted to ‘Live Life’ in the Country of there birth. I mean sure, maybe they are just following Government Orders but lets face the fact, Australias Services are now becoming representatives of an Australian MAFIA.

    So how does this end? Badly. People like me will be in jail sooner or later, for sure. Why? Because I dared to speak out against this MAFIA. Who’s next? Im sure they’d lockup every Australian if they could but they just cant afford all the Jails. It costs money and they dont have enough of a workforce to keep this Country functioning ha ha.

    I guess its like all confusing things. Often, we dont know whats going on at the time but gut instinct usually tells you somethings wrong. I think its pretty obvious something is wrong and has been wrong for quite some time. Its pretty obvious Australias Government has done this to itself.

    Im just waiting for the day when Australia murders off its own Citizens. We arent far away from that now. Arrogant twats like me will be the first to go.

    Governments no longer ” By the people… For the people “. Its now a corrupt version of MAFIA. Protect the Power. Thats all Australia is now. How can this end well? I mean really… how can this end well?

    I dont think it takes a genius for Australians to see this is going to a bad place. Im just waiting for the Authoritarianism and the Aggression to come out. It feels like its not far off.

    Australias Government is Enemy of this Nation… and I truly believe that.

    • Interestingly in the pub yesterday, there was a man going off about this to his mate at the bar. The notion of living freely has been eroded. He was not quite as eloquent as you but got his point across as only a man with a got full of grog can

      • boomengineeringMEMBER

        Mathias.
        Australian politicians have never been patriotic nor cared about the people. Just look at our history of holocaust, slavery, ethnic cleansing, apartheid . Where do you think our first permanent residents of 1629 and all those pre Cook settlers ended up.
        btw European DNA in Aborigine’s is traced back near 400 years.

    • DingwallMEMBER

      This government is a disgrace. That said the last 5-6 have been disgraceful too. They just lurch from one sh!tstorm to the next. There is no clear strategy and goal for Australia other than pump real estate and cross every appendage they can.

      • Everyone is feeding on the house price pie
        It’s what’s keeping this Ponzi circus going
        When the music stops as they say…..

        Even Bernie Madoff will be shaking his head and saying “how did they get away with it for so long”

    • Mathias
      The types & angles that algo’s out there use is more myriad than Bubba Gump’s Shrimp list!
      There’s hundreds in any style you can think of – & then the personal variants to add.

      The ATR you point to is good for determining position sizing & stops via volatility.
      ATR Stops (Like Chris uses) is a good blunt place to start (imo), but it’s only good for chasing trends moreso than R2M.

      A Helluva lot of retail bots use R2M because the hit rate is so much better than trend chasers – making it an easier sell….. Providers like them too as it’s more likely to give them more churn….None I’ve ever seen give consistent pinpoint calls each time.

      Anyone serious about them, run a diversified herd of styles to smooth their equity curve & spend their time writing more, or improving what they’ve got if falls too far out of it’s curve. They’re far more like Quants than TA’s.

    • Yeah but the odd article here and there about falling house prices during an upturn has always been around to quell the anxiety amongst those who aren’t home owners.

      • B is correct but he is not a god so – can’t predict the timing accurately. The market knows this. Thats why property prices and rents are going up – game of poker, more and more bears are folding early and will lose big time. Only the early bulls and the late bears win

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