Australian dollar poleaxed as Fed hawks take flight

See the latest Australian dollar analysis here:

Macro Afternoon

Forex markets have comprehensively puked their recent funk into a period of volatility and the Australian dollar is covered in stink. DXY is re-entering its bull market and EUR is getting murdered:

The Australian dollar has destroyed the neckline of its head-and-shoulders top against DXY. Its equally weak versus JPY. EUR is falling almost as fast:

Ominously, it is far weaker than its EM commodity basket:

CFTC contracts moved 9k short:

Gold is vomit as real interest ratee bottom and DXY soars, as expected. Oil will also struggle against this tide:

Base metals bust:

Big miners bust:

EM stocks looking a little shaky again:

But junk is still serene so no need to be overly bearish:

Then again, the US bond market is howling policy error as the curve caves in:

Which is not pleasing stocks. Value is a goner. Growth fell but did better:

The major event of the evening was Fed governor James Bullard:

Now, you should be aware that the FOMC operates very differently to the RBA. Its governors are much more independent and open with their divergent views so this is not “The Fed” speaking, it is James Bullard. When RBA governors speak they very rarely break with the consensus script.

So, that means that the Fed is still dovish in total so there is no cause for panic. That said, tapering is clearly on the agenda, and the process towards tightening has begun. So there is some momentum that way.

The two points come to head in what happens next in the global economy. In my view, the Fed dissidents have moved at precisely the wrong moment. The US fiscal impulse is about to crash. The inventory super-cycle is about to ease. China has already tightened credit hard and will keep doing until the commodity bubble fully bursts. That has started.

Within a matter of months, maybe even weeks, we will see global PMIs begin to fall away as new orders top out and fall fast. The early gyrations we are seeing today on the Fed pivot may morph very quickly from an inflation unwind to an outirght growth scare as corporate profit growth also peaks.

I said on Friday that my base case of a 50% probability is that the inflation unwind will be benign for equities as value rotates back to growth and falling input costs boost margins even as the commodity bubble bursts and Australian dollar sinks.

But, I had a risk case of 30% probability that US and China slow more than Europe speeds up just as Fed policy error plus runaway DXY smashes inflation, high yield debt, equities and crushes the Australian dollar.

If the Fed is going to keep up the hawkish jawboning then that risk case rises to 40%.

What is equally crucial to note, however, is that the full FOMC has not yet committed this policy error. If markets do tank in anticipation of it as growth and inflation fall away, then it will be very easy for the Fed’s dissident hawks to backtrack and tapering to disappear.

I do not see the US labour market anywhere tight enough over H2 to prevent this if need be.

In short, buy the dip is still in operation for equities which may prevent any sell-off from gaining much momentum from Fed taper talk. Or not!

Anyways, enough game theory. The Australian dollar is still biased down until we discover the pace of Fed tightening, not to mention how quickly the commodity bubble is going to fully pop as China slows.

Houses and Holes

Comments

  1. MathiasMEMBER

    Very likely wrong on this as its just superficial and quick…

    Gold to fall to $200-300
    Silver to fall to $4

    Im thinking I’ve taken it too far on the low side but guess we will see.

    I’ve heard through a friend that Australias Perth Mint is worked off its feet. Australians are buying up Gold and Silver like crazy. Slow response times from all the orders they keep receiving. We live in interesting times.

    • 70% of silver mined is needed by industry.
      70% of silver mined is being bought as an investment.
      $4 is never going to happen in the physical market.

  2. russbw the idioticMEMBER

    opex was important. Euro open Fri quite a few decent size shorts (which was notable at the time compared to other Euro opens) were piling in on es which I think cracked things before rth. The Fed is thinking about thinking about and as far as I know still maintaining purchases. June seasonally weak. Fed purchases if you look at Fred backed off last June https://fred.stlouisfed.org/series/WALCL , and we got a decent correction. One has to wonder if this may morph or not on es and if purchases back off at all. If it follows the script of last June then it was roughly 10% on es but bought aggressively.
    For those who like TA a fairly decent bearish rising wedge was busted at about the 4185 level, but time and again shorter term wedges have been busted only for things to turn back up. I don’t use TA much but it’s interesting.

  3. FUDINTHENUDMEMBER

    It’s all about confidence (sentiment) babyyyy. And when that turns, well..

  4. scottb1978MEMBER

    My take is aud doesn’t fall much and may increase as we just aren’t as good at money printing as everyone else.

    • FUDINTHENUDMEMBER

      Lol Phil Lowe himself will be out the back, sleeves rolled up, shovelling coal into the furnace that makes the printers go brrrrrrrrrrrp!