What is fueling the Australian dollar rocket?

See the latest Australian dollar analysis here:

Macro Morning

DXY was hammered last night as EUR gained. The technical damage is limited but this tells us something about an easing safe-haven trade:

The Australian dollar remains a one-way ticket up:

Oil too:

All commodities:

But miners got plastered:

EM stocks are still clawing their way back:

As is junk:

The US curve is suddenly steepening again:

And stocks have erased most of the losses though Growth struggled last night:

Westpac has the data:

Event Wrap

The Fed’s Beige Book of regional economic conditions repeated that the economy grew at a “modest to moderate rate,” but that prices were “significantly” higher. The overall economic outlook was generally positive, but some districts reported increased uncertainty and “more cautious optimism”. Several districts noted that activity had slowed due to supply chain disruptions, labour shortages, and uncertainty regarding the pandemic. The majority of districts reported “robust wage growth.”

Event Outlook

Australia: Payrolls for the week ending 25 September will provide a first view of the state and national labour markets as lockdown’s end came into view.

Europe: Consumer confidence has been on an upward trend in 2021 as the Continent’s economies re-opened and risks abated.

United States: Initial jobless claims are back at pre-pandemic levels and are expected to stay there. A robust gain in existing home sales is forecast in September, although deficient supply remains a material risk for sales activity. The September leading index and October Phily Fed survey are also due, while the FOMC’s Waller will speak on the US economy.

There are a number of reasons why the Australian dollar has suddenly blasted off:

  • The turn away from zero COVID started it.
  • The energy bubble really got it moving.
  • The immense short position added rocket fuel.
  • Finally, we got this last weekend, via Goldman:

On Friday (Oct 15), the PBOC held a press conference on Q3 money and credit data. During the conference PBOC responded to market concerns on property financing and Q4 monetary policy stance. In sum, PBOC confirmed the incremental monetary policy easing on property financing, and by stating that“liquidity conditions would remain stable and PBOC would use MLF and OMO to adjust liquidity conditions”, it lowers the probability of an RRR cut in the rest of the year and we no longer expect an RRR cut this year.

Given the broad-based nature of the risk-on rally this week, this is the key change. The PBoC has waved its Jedi hand and declared “this is not the recession you are looking for”  and befuddled markets are off to the races again, with the AUD leading given its China association.

I don’t buy it. The base case remains that the PBoC is not yet doing enough to prevent Chinese property from getting worse, especially given the regulatory and fiscal context has gotten even worse this week:

And I still expect the property shakeout to collide with the end of the energy bubble and a material US slowdown such that global growth disappoints in the near future.

But it will take some time for the market to return to this reality and in the meantime, it is a risk and AUD party!

Houses and Holes

Comments

  1. The Traveling Wilbur 🙉🙈🙊

    Satisfactionium. It’s a rare element that expands in the presence of burning shorts.

    • He says a lot of things, but this is the second time in two days I’ve seen this comment. What did he say?

      • he said all commodities would rocket along with aud (aud @ 90, 10yr to 3% and IO @ 300 were part of it from memory). Not all pinpoint but the general concept is playing out.
        he also mentioned some time back euro banks might be the canary when it all starts to unwind. reading recently of several euro energy suppliers/wholesalers going belly up cos of fixed contracts, or just not renewing contracts due to supply. must flow on to banks i guess. time will tell

  2. Jumping jack flash

    If the rest of the world is merrily inflating away, and with good reason – they need to resume [private] debt spending on the back of inflated wages from their own services economies, and Australia is late to the party (but not too late i hope, for all our sakes) wouldn’t that somewhat account for this rather than China?

  3. The AUD can be correlated with 95% accuracy to the trade-weighted basket of export commodity prices.
    LNG, coal, iron ore, wheat, aluminium, nickel, copper, sugar, cotton, beef, lamb, all the stuff we ship out is creating a massive trade surplus, which pushed the AUD up!
    Not rocket science.

  4. It’s the inflation trade. Stocks, commodities rally, nominal bond yields go up, real yields stay depressed and the big dollar tanks… until the Fed actually reacts. The market is clearly looking into the eyes of the FOMC end saying they’re cowards. Not sure they’ll be right though. Only two weeks to payrolls and FOMC. If we get the Fed moving and then a strong payroll, both highly likely, it’ll turn to mush, as have most trends this year.

    • The Traveling Wilbur 🙉🙈🙊

      Too chicken to draw some dots a bit higher up on a page than last time you mean?

      • Well, they’re going to wind down their asset purchase program by mid year 2022, they’ve made that clear. In that respect they have bigger nads than Lowe, whose totally out to lunch

    • ‘big dollar’ hasn’t tanked though. It is around 1 year highs right now.
      Would be interested as to what your commodity index model is saying in regards to the energy price rises offsetting iron ore falls. DHS said they have offset each other.

      • Nice timing! I’ve just updated my spreadsheet. Basically, commodities fell in July-August on the back of iron ore, but then the lift in coal – both thermal and met – has pushed the commodity price index almost right back to its late July highs. Clearly, the price rises in coal are temporary, but going into winter, temporary could be months, not days… The ToT index is also above its 2011 highs. So the commodity complex is going to add something like AUD 100bn to Australia’s exports this year and is consistent sith nominal gdp growth way above Treasury forecasts. Josh is gonna have lots of sprinkle money to throw around.

        • Seems like Oz economy is on its fifteenth life somehow……
          Always amazed at your quick responses with such a wealth of info. Really appreciate it. Thanks a lot.

  5. You got the AUD/USD call wrong for now. It would be easier to take if you weren’t hyperbolic about your call on AUD going down.