Australian dollar tumbles as iron ore bubble pops

Forex markets were relatively unexciting Friday night but under the surface significant moves took place as DXY firmed, commodities slumped yields fell back with them. Is this the topping of the inflation panic? DXY was firm as EUR fell back:

Australian dollar was weak against all DM crosses:

Gold and oil did OK:

But base metals tracked another crash in iron ore futures:

Big miners are retracing the iron ore bubble pop:

EM stocks are still toppy:

But junk is fine:

ASs yields pulled back:

And, oddly, tech fell again while the broader market held:

It’s not hard to see where the Australian dollar weakness came from as all base metals and bulk commodities were smashed. Iron ore futures are down 20% plus from the peaks. RBC sums it nicely:

China’s credit impulse has turned decidedly negative in recent months. Statements from policymakers have consistently emphasised the need to shift towards “prudent” policy, which means less stimulus, and a reversion to the pre-pandemic deleveraging policy. The turn back towards deleveraging has already reduced China’s sequential quarter-on-quarter growth momentum. Historically, sustained deleveraging cycles have unleashed disinflationary pressures in China, as in 2013-2015 and 2018when headline CPI fell under 2% y/y at the end of both cycles. Current Chinese headline and core CPI inflation are running under 1%, so we may expect continued muted domestic inflation now that a new deleveraging cycle is underway. Previous develeraging cycles also exerted negative pressures on global commodity prices. Chinese import data confirmed marked drops in imports of industrial commodities such as iron ore and copper during previous cycles. Consequently, the start of a new sustained deleveraging cycle in China may be expected to undercut the inflationary pressures arising from the US and European economic rebounds. It is difficult to parse the net effect on global inflation given the various countervailing forces at work. Nonetheless, China is likely to exert a disinflationary impulse on the global economy through a combination of expected growth moderation and weaker commodities demand. A likely more directly negative impact is on those commodities where Chinese demand is crucial, and iron ore is an obvious one. In this regard, the Australian dollar is likely to face headwinds amid an anticipated downturn in Chinese iron ore demand.

It has already begun with Chinese yields rolling over:

The Australian dollar is on a hiding to nothing as iron ore approaches the cliff ahead.