Australian dollar falls into Jackson Hole

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Forex markets calmed down a little Friday night after last week’s extended fireworks for the Australian dollar. DXY gains eased off and EUR rebounded:

Australian dollar has no support to 70 cents:

CFTC data shows increasingly aggressive short positioning in AUD but there’s more room still:

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Oil is fooked. Gold is going well all things considered:

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Base metals dead cat bounced:

It was more like a dead jellyfish splat for bid miners:

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And EM stocks:

Junk was soft:

Yields mixed:

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It was BTFDFAAMG!

Not much data to report and that was enough to let risk assets off the hook for the night. But last week was still a crucial break for the post-COVID recovery. It bore out both the bearish China case and the hawkish US case. That combination has begun the commodity price crash in earnest.

With markets yet to price any real harm, there is no reason for the Fed to pause. This week brings the annual Jackson Hole gathering of American monetary economists which brings with it almost as much dandruff as a big winter dump on the slopes above the village. Thankfully for the town, this year will be virtual-only. Goldman has more on the impacts upon DXY

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USD: Monitoring Fed and global growth tailwinds. The broad Dollar continued to climb over the past week, alongside a further deterioration in global growth sentiment across all markets. Our Chart of the Week shows a model-based decomposition of G10 FX returns vs USD so far this month. According to the model, relatively hawkish Fed pricing has played a role supporting the Dollar: wider 5yr rate differentials have subtracted 40-50bp from most USD crosses month-to-date. But a bigger factor has been the downgrade in global growth expectations—captured by the model through several proxy variables—which has been a drag of 100-250bp on G10 currencies vs USD since the end of July. Both drivers likely need to turn for the broad Dollar to move lower on a sustained basis. Minutes of the July FOMC meeting, released Wednesday, arguably helped narrow the range of possible outcomes for QE tapering. As our economists noted in their summary, because most participants preferred to reduce bond purchases “this year” and most thought the UST and MBS programs should end “at the same time”, a November taper announcement and a $15bn per meeting pace now appears the most likely outcome (this would conclude QE at the end of September 2022, leaving room for a Q4 2022 rate hike if needed). We may learn more details about the Fed’s asset purchase plans and its economic outlook from Chair Powell’s remarks to the Jackson Hole symposium on Friday, August 27. However, while Fed-related uncertainty may be narrowing, global growth expectations continue to come down. Our economists reduced their forecasts for Q3 GDP growth in both the US and China over the past week, and covid outbreaks in several countries have yet to stabilize. Given the large role global growth expectations seem to have played in recent G10 FX performance, we will need to have more confidence that the delta outbreaks are waning before recommending fresh pro-cyclical Dollar shorts. Until then, the best FX opportunities are likely in the risk-neutral crosses in G10, including AUD/NZD, and high carry-to-vol expressions in EM (discussed further below).

It’s not Delta. China has killed the reflation with credit clamps and the Fed is about to cremate the body. There’s no bottom for the Australian dollar until one or both reverse.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.