Australian dollar OMICRON whipping boy

See the latest Australian dollar analysis here:

Australian dollar free falls as Fed hikes return

DXY was roughly flat last night though all over the place in the process:

Australian dollar likewise though rising risk-off is obvious in the yen cross:

Oil lol:

Base metals softened:

Big miners are still hanging on:

EM stocks recaptured support:

Junk got worse:

As the Treasury curve pancaking really gets moving:

Which stocks did not like much:

Westpac with the wrap:

Event Wrap

The second day of testimony from Fed Chair Powell largely repeated yesterday’s key messages, emphasizing the likelihood the FOMC will accelerate the pace of tapering, as well as highlighting persistent inflation pressures.

WHO said that current vaccines do appear to be effective against the omicron variant, although further information on its communicability, morbidity and severity of symptoms is unlikely for another 10 days.

US manufacturing ISM survey was as strong as expected, with the headline reading of 61.1 (est. 61.2, prior 60.8) reflecting firmer new orders (61.5, prior 59.8) and employment (53.3, prior 52.0), while prices paid pulled back to 82.4 (from 85.7). ADP employment in November was close to consensus at 534k (est. 525k).

German retail sales in October disappointed, as Covid concerns appear to have weighed on consumers, with a fall of 0.3%m/m against an expected rise of 0.9%m/m.

Event Outlook

Australia: Housing finance approvals are expected to lift in October as house prices continue to rise and turnover increases on reopening (Westpac f/c: 4.0%). A narrowing of the trade surplus is anticipated in October due to a rebound in imports and a further pull-back in export earnings as a result of falling iron ore prices (Westpac f/c: $10.8bn).

NZ: In Q3, the terms of trade are expected to lift further with price gains for commodity exports outstripping those for imported goods (Westpac f/c: 2.0%).

Eurozone: Strength in employment growth should continue to see the unemployment rate gradually fall in October (market f/c: 7.3%).

US: Initial jobless claims are anticipated to stabilise after recently hitting multi-decade lows (market f/c: 240k). The FOMC’s Bostic will discuss the high cost of housing at a virtual conference hosted by the Atlanta and Dallas Feds, and will then take part in a discussion at a virtual Reuters event. Quarles will share his departing thoughts to the American Enterprise Institute, while Daly and Barkin speak at the Peterson Institute.

UBS with some analysis:

There may be light at the end of the tunnel, but the tunnel seems to have gotten longer as more bad news around the coronavirus crisis has emerged. Various countries across Europe have implemented stronger controls due to the rapid rise of COVID-19 case counts, and although these cases are still predominantly caused by the delta variant, omicron is working its way through and posing a risk to even well-vaccinated areas.

The US dollar has gained in the last couple of months due to rising expectations of policy tightening by the Federal Reserve. Now its safe-haven at-tribute is adding fuel to this trend. However, markets are increasingly asking whether the Fed is ready to tighten in light of the new developments. We think that inflationary pressure is strong enough in the US to allow tapering to proceed in line with the Fed’s plan, i.e., to end its asset purchases by the middle of next year, if not sooner. There is also considerable uncertainty over the outlook for fiscal policy, but we expect a government shutdown to be avoided and the debt ceiling to be raised in time to avoid a default. We therefore think the path to EURUSD 1.10 is well paved. In our base case, we expect solid support around 1.10, but the latest round of volatility might make room for more downside.

We expect the European Central Bank to keep interest rates negative for a long time, and its discussion around plans for asset purchases after the PEPP emergency program ends next spring is not helping the common currency. We therefore see little upside for the euro, unless the global economy suddenly looks much brighter.

As we know, AUD is a EUR proxy.

My own thoughts are developing probabilistically into three scenarios:

  • OMICRON is harmless and Fed tightens. Chinese keeps brakes on property. DXY up. AUD down.
  • OMICRON is somewhat harmful to DMs, Fed pauses, Chinese stimulate as exports are hit, DXY down. AUD up.
  • OMICRON is harmful and triggers new DM lockdown wave. Fed pauses. China flood stimulates. But risk assets hammered and DXY up. AUD down then up.

There are obviously subsets on a continuum of these scenarios.

We’re doing a poddy today at 12.30 to flesh these out. Consider yourself invited.

Houses and Holes
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  1. Don’t need a helmet got a hard hard head
    Don’t need a raincoat I’m already wet
    Don’t need a bandage there’s too much blood
    After a while seems to roll right off hmm

  2. I don’t know but do you not think this market(and other asset classes)are seriously overvalued in very uncertain times and that a grain of sand could be enough to change sentiment.And couldn’t we be heading for a depression?(technically or non technically).And if that occurred wouldnt Australia and its associated currency be heading out the back door?

    • We are far from a depression but there are huge red flags like this for the stock market at the moment……valuations are insane

      A veritable army of bond shorts in the US is starting to get into trouble at these levels…….There is a huge air gap under 1.79% on the 30 year to about 1.57%, they must get that level back or buy Treasuries at any price to cover their shorts. For the 10 year I think the levels are 1.37% and 1.17%

      • The Travelling PhantomMEMBER

        It’s depressing we are far from depression.
        Part of me thinks only way to reset all this madness is a depression

      • How do you know when your close to a depression?Did they know in 1929?Are we more knowledgeable now than they were?I guess if we know we are getting close we could avert all future depressions?Im clearly not an economist and would really value some answers from anyone who can

        • Well, I am just sitting at home but I think history shows that for a real depression in modern times the financial system has to fail first. That can be from speculation causing the enabling banks to fail, hyperinflation by central bank action causing the currency to fail, or a failure of the money supply due to sustained policy missteps by the fiscal authorities. Probably there are others that experts could cite.

          Remember that the last depression we had was at its worst in 1932, the failure was in 1929, so you should have plenty of warning, now is the time for risk management to be put in place……..sadly lacking I am afraid.

        • In the 30’s they chose austerity and brought the depression on, we seem far more likely to print our way out and bring on inflation than a depression, maybe stagflation?
          Depression is as much a policy choice as anything in my opinion.

          • There was government spending programme after government spending programme in the United States in the 30s- none of it worked!

  3. SuperfluousMEMBER

    If the cost of money is any guide, we are living in depressionary times…
    Got to look past price (trees) to see the reality (forest)…

  4. Why is it the AUD typically creeps up in the local daytime and falls at night?

    Is it because people here are so thoroughly sure we’re the lucky country, that everything really is fine with the economy, our trading partner(s), the future outlook they bid the AUD up?
    Meanwhile, the overseas traders look and see enough to know something ain’t right, but haven’t yet put a finger on it enough to crash this sucker, and so the effect of gravity isn’t affected by the situational gravity enough to force true price discovery?
    Anyone got a theory?

    • I would love to get the same answer. I would also add that any move down in the aud is a sharp quick one whereas most of the move up is gradual and persistent. It seems that the market get a quick jolt of reality then drops the aud but quickly goes back to its default panglossian euphoria where it slowly drips upwards forever. Looks like market manipulation
      maybe but I really have no clue. Whatever it is it has annoyed the hell out of me for the past five years I’ve kept a large short on.