JPM: Sell Australian dollar with both hands

See the latest Australian dollar analysis here:

Australian dollar booms on American job shocker

The Australian dollar broke into the 75s again Friday night before rebounding. DXY rebounded and EUR fell with all of the usual outcomes. To the charts. DXY versus EUR:

The Australian dollar is forming new downtrends against all of the major forex pairs. Not a good sign:

It is more mixed against EMs but even here some key competitors are turning stronger than AUD:

Gold and oil both eased:

Base metals all sold:

As did big miners. RIO and BHP have very similar head-and-shoulders topping charts to the AUD, hinting at the role of iron ore in both:

EM stocks still ugly:

High yield is fine though EM looks a little like a downtrend:

US yields lifted again:

Along with stocks. S&P is a rampaging bull. Nasdaq has erased most of its losses, largely driven by the quality end:

The newsflow was pretty muted. But the week ahead is chock-o-block with critical US data:

  • Wednesday NFIB and CPI.
  • Thursday Powell speaks and Fed delivers Beige Book.
  • Friday retail sales, Empire and Philly Fed, industrial production and NAHB.

The numbers are all for March so will still be on the near side of the major base effect spike though certainly ramping up, perhaps best captured in oil:

Crazy inflation in the short term

Crazy inflation in the short term

The data is likely to be strong across the board with the first round of Biden stimulus on deck and the manufacturing catch-up growth rebound still in full roar.

It is important to note for forex that Australia is six months further into the catch-up process than is the US. As such, our domestic data flow will ease before the US data ramp-up is done. This is one reason why JPM is still bearish Australian dollar:

Bearish antipodeans; short AUD/USD and NZD/USD. NZD screened as one of the most fully-priced currencies in terms of monetary policy expectations several weeks ago.This was at odds with our interpretation of RBNZ guidance that macro-pru would be the primary tool for tempering housing prices, rather than interest rate mechanisms. The rates market was then upended following the government’s new housing policy announcement and has catalyzed a significant repricing in NZD/USD lower. Notably, despite a major adjustment in the short-end since the announcement(2y1m OIS 30bps lower), our strategists note that there is still space for further repricing, especially given our expectation that the RBNZ will ultimately be forced to cut rates later this year. Relatedly, an adjusted model incorporating housing infers that a 3% correction in housing would peg NZD/USD at about 0.68, our target for the trade and also our current year-end forecast.

Separately we hold short AUD/USD, which we sold on a mix of heightened trepidation in risk markets with higher yields and some local headwinds from growth and the central bank. Risk markets have held in favorably and yields are lower despite strong US data which has buoyed AUD. But we expect a slow-down in AU data, particularly as the impulse from fiscal support begins to fade with the expiry of the JobSeeker program, and also the expectation that the RBA will in the next several months institute their own version of macro-prudential safeguards (though admittedly not as strict as NZ). And of course, the RBA remains especially aggressive and attentive to repricings in the rate market, and as we noted last week, the amount priced into RBA expectations still seems elevated given the growth and inflation outlook in Australia, in addition to RBA communication.

I agree with all of that except the move to macropru policy, which is a year away before the discussion turns serious. Markets have the RBA’s (and RBNZ’s) reaction function completely mispriced as usual, courtesy of Westpac, there are no rate hikes coming for either economy in the foreseeable future for either economy and, increasingly, the possibility of cuts:

Idiot algos yet to catch-up to macropru reality Downunder

Idiot algos yet to catch-up to macropru reality Downunder

Add fading Chinese data in H2 and the outlook for AUD remains bearish.

David Llewellyn-Smith

Comments

    • In an ideal world, a government should enact a counter-cyclical policy; i.e., spend big and cut taxes in downturns to keep the people working, and cut expenditures and hike taxes in boom times to bring the budget back to a balance and prevent the economy from overheating.

      But you must remember that voters are stupid, selfish and greedy. It is near-impossible for a democratically elected government to cut expenditures and hike taxes in boom times unless you are prepared to be voted out of the office. The end result is predictably a mess.

      • > But you must remember that voters are stupid, selfish and greedy.

        Australia does seem to be having a few problems with its Government lately.

        Remember when Australia had JOBS ? Ha ha. Wow… those where the days… so long ago.

      • Ailart SuaMEMBER

        “But you must remember that voters are stupid, selfish and greedy. It is near-impossible for a democratically elected government to cut expenditures and hike taxes in boom times unless you are prepared to be voted out of the office. The end result is predictably a mess.”

        Voters are also somewhat intellectually challenged in accepting a leadership selection process that’s been creating this ‘mess’, over and over again for a very long time. Einstein may have suggested looking at a different method of selecting governments and making them accountable and more efficient. Maybe something along the lines of the way corporations select their leaders. Politics and divisiveness must be eliminated from the mix, as they are in any efficiently led entity. We don’t want politicians and politics, we want quality leaders and managers on the same page, working efficiently for Australia, all of its citizens and future generations.

        Again, as Einstein may suggest, we need to be thinking at a higher level. Primitive, divisive-driven, Westminster-style oligopolies hit their use-by-dates around half a century ago.

        • One model would be to add an extra component to the voting power that is proportional to the tax one paid, like the voting power in public corporations that is proportional to the number of shares shareholders own. Paying no tax means not contributing to the nation building, so there is no reason to be entitled to have the extra voting power. I also bet tax evasions can be easily and totally eliminated in this model.

          • drsmithyMEMBER

            Just what we need. The rich with even more influence.

            Hey, maybe businesses should get a number of votes as well based on how many employees they have ?

            Hard to tell which idea is dumber – giving the rich additional, legally-enforced voting power, or selecting our Governments the same way world-destroying corporations have been selecting theirs.

            🤦‍♂️

          • The rich and the corporations already dictate government policies through lobbying, so the ordinary folks will hardly notice any difference.

          • drsmithyMEMBER

            The victim is already dead, so why bother charging anyone ? They’ll still be dead.

    • That pretty much just summarises bcnich view.
      Especially “As the IMF makes clear, there is nowhere to hide….. I suspect that global debt ratios have passed a point of no return.”
      Incredible that these words and phrases are being used in the MSM.

  1. happy valleyMEMBER

    “… and, increasingly, the possibility of cuts”

    The RBA happy clappy angels of death will not be content until they have gone negative?

  2. SoCalSurfCreeperMEMBER

    Can confirm the US appears to be booming. Lots of observations and anecdata. Restaurant prices are thru the roof. A steak that was $45 pre pandemic is pushing $60. And It’s hard to get tables. Went to a steakhouse in Del Mar, California last night and it was packed inside and out. It’s even really hard to get ubers to and from. They can’t keep up. Uber prices seem to be up 30%. Costco is packed every day. Friends in the elective surgery business report that they can’t hire nurses and when they do they can’t hold onto them because they leave for a better offer, sometimes in weeks. There are waiting lists for cosmetic surgery. They can’t keep up with people wanting boob and nose jobs and the rest. My neighbour is a commercial pilot who spent most of 2020 at home. I was worried he may never work again. Now he’s never home. My healthy 17 year old son got his first shot today (Pfizer) at the stadium super station, so in this area it’s available to everyone. Almost 45% of people in the county have had at least one shot. Unless a new variant brings it all undone the pandemic seems to be more or less over.

    • If that were true then Biden should be raising taxes and cancelling/deferring the infrastructure projects. But the chances are he won’t, and the history will repeat itself once again.

      • More debt and inflation. More debasement of the currency. More fraud in the precious metals markets. More appropriation of savings. More money and power to the 1%. Less money and power to the 99%

    • Ritualised Forms

      Unless a new variant brings it all undone the pandemic seems to be more or less over.

      ……and therein lay the greatest single risk for Australia. Later this year or next year as the price of iron ore slides inexorably beneath the waves, a nation inordinately reliant on tourism and foreign students – not to mention foreign nationals buying our houses – will find itself still unable to bring foreigners in, in large enough quantities to make a substantial economic difference.

      All because its government, its Federal Government, has utterly coqued up the Stranded Australians situation and the Vaccine rollout, and will find itself in the situation of having to wait with bated breath as every planeload coming in carries a risk of transmission into the wider Australian community.

      • two plus twoMEMBER

        That’s one of the risks with mass vaccination during an active pandemic. It has the potential to move the pandemic in a very bad direction and potentially back to square one. Progressively following the vaccination, additional selection pressure will favour the new variants as the original variants are eventually vaccinated out of circulation. There will still be enough virus in circulation for existing and future mutations to adapt to the vaccinated population.

        I suspect the best we can hope for is that the vacciene makes the virus less deadly to those vaccinated – to the point where it will be socially acceptable to let it rip while we all get back to ‘normal’. Can’t see how that is a guaranteed outcome though. I hope it is for everyone’s sake, but it seems to be the chosen path forward because that’s all we have in our collective toolkit (rather than having multiple options available and actively choosing the best).

    • Great info re US

      Thanks

      Definitely a concern in the US, that with people all close together, they have another outbreak

    • SOCAL,
      I think the US sharemarkets are about to explode higher as the US really starts re open now,…..
      Think USD may fall further from here
      Second half this year inflation in the US is going to become a real problem

    • Unless a new variant brings it all undone the pandemic seems to be more or less over.

      Great info, interestingly I was talking to a friend in Tel Aviv(Israel) and he said much the same thing, everything is booming with even night clubs having recently reopened. (big change from the 10K / day infection rates in Jan). That said I’ve heard that in other countries with significant vaccine programs that things are not so rosy, it seems to depend on which Vaccine you get. The Chinese Vaccine seems to be the least effective at suppressing the infection rate, whereas the Pfizer vaccine looks to be the most effective at both reducing infection rates (herd immunity) and taking the punch out of Covid19 for those that do still get infected.
      Lots of good news, but lots of work still to be done,(especially in places like Africa) before we can safely assume we’ve seen the back of Covid19 and its variants. On that point the good news is that so many of the variants are so similar, even though they originate from completely separate sources.

    • Display NameMEMBER

      Gotta say I dont miss Trump and those agonizing press briefings. Looks like the damage, so far, that was wrought on the US public service by Trump might be limited. The Vaccine rollout looks pretty efficient. We could vaccinate Aus in just over a week at the US rate.

      • two plus twoMEMBER

        Speed of vaccinations would likely be limited by the logistics and healthcare professional capacity (once supply constraints are removed). Unless you’re going to import a US sized logistics and healthcare contingent along with the vaccienes, I’d expect the rates of vaccination to track closer to population adjusted rate (rather than a massive nominal number of vaccinations…).

    • innocent bystander

      but, everyone keeps saying no inflation?
      gotta say here in the West I am seeing inflation in all the inputs (esp house building), labour too (for those with skills, esp trades)

      • drsmithyMEMBER

        I have some friends in Central QLD keen to build a house but have been told the earliest commencement could be Q1 2022.

    • There is going to be a major financial crisis in H2, that will change the dynamics of this. The deleveraging in global debt & derivatives……will be in the 10s of trillions, possibly $100 trillion in this crisis..10 to 50x the size of 08….its going to be the biggest financial crisis ever (GEFC) “ the greatest ever financial crisis” and the biggest economic downturn…..a .much bigger economic contraction than the 1930s. Many of these issues will be addressed out of necessity. V Painful too.
      Many of these imbalances and excesses are going to be worked out
      Australia’s GDP could contract 25%, as our banking system is pushed to breaking point and possibly collapse. We will be forced to face many issues we’ve been able to avoid …….by just getting away with increasing our debt, that won’t be the case 2022 onwards. We will be forced to find a new way forward

      • The current system of theft by debasement is not fit for purpose and needs to change.

        • And it will, only because of crisis
          Who knows what they will come up with to try and fix the mess they’ve created
          Guess just borrow & print more money
          They don’t have anything else in their bag of tricks

      • I agree that king dollar will no longer be king dollar, but do not agree with Schiff on gold. Gold is a king of commodities but can only appreciate in line with a basket of commodities – which include platinum, silver, copper, titanium and others. Gold is already quite expensive, so I would think its upside is rather limited (with respect to the other commodities).

        https://www.macrobusiness.com.au/2021/03/bitcoin-sure-aint-behaving-like-gold/#comment-4099526

        I do not see a return to a gold standard, mainly because gold has very limited liquidity. The most one can expect in this direction is a “commodity standard” in which gold has some share of the basket.

        • Gold hasn’t got adequate liquidity in relation to global GDP but this could be fixed by a huge upward revaluation 😉

          • Therein lies the problem. If you try to assign adequate liquidity in relation to the global GDP to a single commodity, then that commodity will have to blow out of the basket of commodities. But there is nothing special about gold, especially compared to platinum, palladium and silver. I cannot see how, e.g., gold/palladium price ratio can artificially blow out from below 1 to over 10.

            You may think, ok, then let platinum and other precious metals appreciate together with gold. But then, where can you draw a line? Copper? titanium?

            It looks to me that gold can only appreciate in line with all the other commodities. Trying to single out gold and lift it up is akin to trying to lift the whole earth.

          • Those other metals have industrial uses so if you try and assign monetary value sufficient for global liquidity needs there would be rampant inflation

          • So gold which has no significant industrial use is the ideal commodity for use as a trusted monetary base rather than a basket of commodities. If this plays out gold will moon but if it doesn’t gold will just gradually plod higher keeping up with the ongoing monetary debasement with the other basket of commodities.

          • Correct – and I think that is exactly what is going to happen (not necessarily “gradually” in hyperinflation).

            Since gold is convenient for long-term storage because it does not corrode or occupy much space, gold is good to own when inflation expectations are high (like now).

        • I agree with dumpling

          Can’t see USD going for a long time

          Can’t go to a gold standard because they’ll need to increase the money supply

  3. Idiots. It’s going to RANGE now. 77c to 72c for the next 24 months. I would subscribe here if MB had a clue about China demand.

      • Gav I think you are right on BTC
        I’ve come around to your thinking

        Although i feel BTC will get hit too in the financial crisis …..

      • The Traveling Wilbur

        … because wherever you turn, there always seems to be this great enormous bill in front of you.

        😀

          • The Traveling Wilbur

            … and because no matter how many sardines you get fed you’re always after more and are usually visibly grumpy about getting on to them.

            😜

    • More than happy to hear what you have to say re China demand. Speak forth we are all ears!