AUD is in trouble in 2022

DXY has broken out and the sky is the limit versus EUR:

The Australian dollar sagged across the board:

Unusually, gold rallied anyway. Oil was soft:

Base metals were mixed:

Big miners took off because Evergradnde is fixed and buy all the things!

EM stocks and junk lifted on the Evergrande rescue, such as it is:

The Treasury market was closed:

Leaving Growth to led stocks in a rebound:

Westpac has the wrap:

Event Wrap

The US observed a partial holiday for Veterans’ Day.

UK 3Q GDP disappointed expectations, at +1.3%q/q and +6.4%y/y (est. +1.5%q/q, +6.6%y/y). Although government spending was firm at +0.9%q/q (est. +0.7%), private consumption undershot at +2.0%q/q (est. +3.1%), fixed capital formation was only +0.8%q/q (est. +2.4%), and business investment was weak at +0.4%q/q (est. +3.5%). Industrial production in September fell 0.4%m/m (est. +0.2%m/m), while services activity rose +0.7%m/m (est. +0.5%m/m) with downward revisions to prior months. Construction was strong at +1.3%m/m (est. +0.2%m/m.).

Event Outlook

NZ: The October manufacturing PMI will highlight NZ’s continued recovery as Auckland’s restrictions eased.

Europe: Industrial production should stabilise in September after August’s drop (market f/c: 0.2%).

US: Hire and quit rates and job openings in September’s JOLTS report will show the strength of the job market as well as the confidence of participants. November’s University of Michigan sentiment survey is likely to again show confidence lagging activity, in contrast to most developed markets (market f/c: 72.5).

Credit Suisse has the analysis:

We now expect the Fed tightening cycle to begin with a 25bp rate increase in Q4 2022. Beyond that, we expect a steep path of hikes, and now see 125bps cumulatively by the end of 2023, and an eventual normalization to 2.75-3.0%. Our inflation forecasts have risen moderately, our expectations for strong jobs growth have been supported by new data, and financial markets have priced in more 2022 tightening than we expect, pressuring the Fed at a time when US politicians are increasingly being forced to address voters’ inflation concerns. These are the reasons for our view shift. We had been reluctant to embrace 2022 hikes because we foresee sharply falling US inflation, slowing global industrial production growth, and weak US real retail sales in the second half of 2022. Those things are typically sufficient to stay the tightening hand of a central bank. But inflation is likely to remain clearly above 2% in headline and core terms in late 2022. In our view, the market is pricing hikes to occur too soon, but is also pricing too few hikes once the tightening cycle begins. Underlying inflation pressures, including a structurally tight labor market, strong housing inflation, and a more tolerant attitude toward inflation by the Fed leadership, is likely to allow above-2% core inflation to persist in the coming years. US core inflation will prove stubbornly elevated even through short term slowdowns, in our view, leading to more hikes than most expect. Recent price data have shown a broadening of inflation pressures.

As global growth slows over the next few quarters and inflation calms down, I still also expect a large commodities complex bust across 2022 so that can stay the Fed’s hand for a while.

But, readers will know that I have long forecast US exceptionalism for this cycle with stronger growth, inflation, and yields than elsewhere, especially China which will lag as it addresses structural problems. I have therefore also expected a DXY bull market and it appears to have arrived in earnest.

With a tearaway greenback and bulk commodities bust lining up in 2022, AUD is in trouble.