Australian dollar falls to seven month low on global growth scare

See the latest Australian dollar analysis here:

Australian dollar sickened by Delta

Forex markets clearly beginning to signal increasing concerns about global growth. Friday night witnessed some of the most bearish action we’ve seen in 2021. DXY was firm and EUR soft:

Australian dollar free fell to new seven month lows:

The market is moving aggressively to get short:

Oil and gold were hit:

Base metals did OK:

Big miners puked:

EM stocks were weak:

But junk debt is still sanguine:

The curve flattened a touch:

But stocks were weak all night:

The major data release for the evening was US retail sales which came much stronger than expected at 0.6% versus -0.4% expected. Why were expectations so dour? This:

As stimulus cheques are spent and income reverts to normal, consumption will as well. A part of this is the end of bonus unemployment cheques:

Plus, a lot of the excess saving is in rich bank accounts so that rundown will not be beneficial as markets think. The following chart is from Canad but it is the same in the US:

As consumption pulls back, the global inventory crunch is going to resolve. In fact, it already is at pace, meaning the great inventory cycle production spike ends:

As consumption and production normalise through H2, the inflation and commodity price bubble will pop, ending the crazed COVID boom and bust mini-cycle.

My strong risk case for a global growth scare in H2 is still gathering momentum.

If it is right then the Australian dollar will get smashed until the Fed breaks towards more stimulus.

If it is wrong then the Australian dollar will fall anyway as the Fed moves to a tightening posture while China slows.

Houses and Holes

Comments

  1. I am onboard with your thesis now. The price action over the past week was pretty clear; asset markets are moving to price risk-off as COVID cases surge everywhere – watch Singapore over the coming week – and as people realise policymakers have limited options.

  2. Government bonds seem like a good place to be, particularly those in USD.

    But what about good quality corporate bonds? Surely they would also lift? (ie. unless the edifice really breaks, in which case they are likely to fall with equities). Am I right??

    • TLT is often a go to. I don’t know enough about Corporate Bonds, except there’s probably another layer of tweaks spread over their risk weightings like most of their share guidance’s? I’m eyeing off inverse ETF’s, TLT, USD, YEN, (CHF less so). FWIW.

  3. surfbeach2536

    Are we about to have another CAPEX boom from projects like the Olympic Dam, LNG, etc that lead to the kind of spike that pushed the AUD upwards a decade ago?

  4. Good points.

    I suppose it depends on whether you are in the inflation or disinflation/deflation camp.

    The above will determine future fed policy action.

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