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 deathfreedom.
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.
