Australian dollar short squeezes as markets turn bearish

Forex markets followed US economic data Friday night as American consumer confidence sagged. DXY was belted and EUR lifted:

Australian dollar short squeezed higher:

Now that the market is getting quite short:

Oil fell, gold rose:

Base metals firmed:

Miners were mixed:

EM stocks are still perilous:

But junk did better:

As yields fell:

And FAAMG led again:

The data flow was poor in the US but how poor? Morgan Stanley:

Are We Losing Confidence?

No, we are not losing confidence in our view that US Treasury yields and the US dollar are headed higher. In the US, markets understandably reacted strongly to the University of Michigan consumer sentiment preliminary report for August. It was a summer Friday, and the idea that sentiment is worse today than at the height of the pandemic is a riddle, wrapped in a mystery, inside an enigma.

The 70.2 preliminary reading was the lowest since December 2011, when the unemployment rate was near 8.5%–over 3pp higher than today. The S&P500 Index ended 2011 flat, but was down just over 5% heading into December. In stark contrast, the S&P500 Index is up almost 19% in 2021.

Not all surveys of consumer confidence flash warning just yet. The Conference Board consumer confidence survey results for July printed at pre-pandemic levels–opening a large divergence from the Michigan survey (seeExhibit1andExhibit2). Naturally, it could fall in August as well, but we suspect it will remain disconnected.

The Conference Board survey is more geared toward the labor market, while the Michigan survey is geared toward personal finances and business conditions.

What drove the consumer sentiment to such depths in August? First, it’s worth mentioning that only 439 households took the survey. That’s right: responses from 439 households allowed for 10y Treasury yields to decline 5bp into the Friday close.

Nevertheless, all 5components of the index fell, as households are struggling with the idea that the pandemic isn’t over and prices may keep rising, eroding real incomes (seeExhibit3). Still, one component that drove the sentiment index lower stood out. Expectations for business conditions over the next year returned to levels that existed about a year ago (seeExhibit4).

…Given the historical relationship between consumer confidence, the labor market, and wealth (equities); the outlook for the labor market; and the abundance of liquidity keeping financial conditions easy–supporting the wealth effect, we think investors should fade the fall in the University of Michigan gauge and remain underweight US Treasury duration and long the US dollar.

It is counter-intuitive that confidence is lower now than during the worst of the pandemic. MS also thinks that the Delta wave will peak in the next 7-14 days:

That said, I am still concerned that the US will slow more than expected into year-end as the fiscal cliff, Delta impacts, and a fading inventory cycle take a toll.

Even so, taper appears locked in so that will amplify the impact of all three as DXY rises.

Despite the market moving short AUD, and the volatility/squeeze risk that that brings, there’s still no argument to own it.