DXY is building an ascending triangle pattern that could presage breakout:
Yet the Australian dollar is trading as a safe haven on all DM crosses:
It is being aided by Wall Street’s hysterical commodity bid:
But how long can that last as historically correlated markets like EM stocks sink?
And while EM junk is pointing all risk markets straight down:
The US curve was belted like a baby seal:
But stocks broke support anyway. This is shaping as a nasty bear market:
Westpac has the wrap:
Event Wrap
Eurozone CPI inflation for January was confirmed at a record high 5.1% y/y in the final reading. Core inflation slipped to 2.3% y/y, indicating that energy prices account for much of the overshoot. Still, the core reading has been above the ECB’s 2% target for four months, with the economy set to rebound from covid restrictions.
Event Outlook
Aust: A rebound from delta, led by equipment investment, is expected to produce a lift in private new capital expenditure in Q4 (Westpac f/c: 3.0%). 2021/22 capex plans should be positive, though covid disruptions still pose downside risk to the upward revision from estimate 4 to 5.
NZ: The trade deficit is anticipated to remain wide in January given the ongoing strength in imports (Westpac f/c: -1250mn).
US: The January Chicago Fed activity index will provide a timely update on activity in the region (market f/c: 0.15). Meanwhile, initial jobless claims are set to remain at a very low level (market f/c: 235k). A very small upward revision is anticipated for the second estimate of Q4 GDP (market f/c: 7.0% annualised). January’s new home sales is expected hold near a strong level given the gradual alleviation of supply constraints (market f/c: 800k). The February Kansas City Fed index should continue to reflect a strong manufacturing outlook for the region (market f/c: 25). The FOMC’s Barkin, Bostic and Mester are all due to speak at different events.
According to interest rate markets, within 14 months Australia will have the highest cash rate in the known universe:
This is the other primary support for the AUD. It is transparently delusional. Australia has the lowest inflation in the DM segment, wage inflation that isn’t getting off the canvas, and a very dovish central bank.
There is also the simple truth that if this forecast came true, house prices would genuinely crash at a pace and depth unseen in a century, unleashing a depression and tide of deflation.
The outlook is nonsense.
But I can repeat all of this over and again and it makes no difference. Rate forwards are deluded until they are not. Hence AUD will resist every other declining risk indicator until it doesn’t.
I will note as well that the last time Russia invaded Ukraine in 2014, circumstances were not all that different and the AUD rose three cents to 0.75 over a few months before it cratered to 0.66 by year end.
In my view, the AUD safe haven trade is measured in weeks and months not years.
