Australian dollar short squeezes higher

See the latest Australian dollar analysis here:

Australian dollar epicentre of building global earthquake

Forex markets sustained their counter-trend actions Friday night, and how. DXY fell like a stone while EUR and AUD are roaring:

It’s a pretty wild rally suggesting a short squeeze yet CFTC data got even longer:

Commodities all rose:

Miners less:

EMs stocks too:

EM junk was soft:

The US curve steepened:

And Growth led stocks again:

So, how far is this rally going to get? The drivers are threefold:

  • The rally kicked off when RBA research suggested that wage inflation would accelerate below 4.6%.
  • It was then fed by the dithering Fed.
  • It’s probably also been given a lift by the shift away from lockdowns in some Australian states.

Of these three I expect:

  • The RBA to delay taper though I am not convinced. They have a bad habit of reverting to glass-half-full form.
  • The Fed to not get to taper this year at all because the China hard landing – such as it is and even if confined to property – will derail it in a global growth scare and correcting markets.
  • Australia to be in recession in Q4 as well, as the rebound is muted by Morrison’s electoral strategy of fear and death freedom.

In terms of forex then:

  • The first should be bearish but might be bullish.
  • The second is a battle between the Fed and financial flows versus a Chinese growth hock for commodities which the later should win before the former can.
  • The third is bearish.

It’s not exactly roses for the AUD so I’d still be looking to use any strength to shift assets offshore, especially so given the longer-term outlook remains DXY outperformance on fiscal, growth and yield leadership.

The major upside risks is a policy error from the RBA and earlier stimulus from China. Of those, the first is more worrying right now.

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