Australian dollar smashed by rampant greenback

The US dollar is on a tear as the global economy lurches towards an accident. We are only a couple of percentage points from a historic breakout within a bullish ascending triangle pattern:

AUD is falling again:

And now there is room for it to continue with shorts puked:

Global recession risks are a building daily as shocks pile up:

• China is in recession as the property bust and OMICRON lockdowns wreak havoc and the PBOC is trapped by the impossible trinity.
• Europe is in perpetual war and energy chaos.
• The Fed is hiking rates at the fastest pace since WWII.

There are two forces behind DXY now. The first is the growing safe-haven trade as markets recognise elevated recsssion risks.

The second is captured by Societe Generale:

The Bond piper leads the FXmarket….

The Treasury sell-off continues…Oil prices are steady-ish, after drifting lower; there is no news (or progress ending) the war in Ukraine, but no upward pressure on natural gas prices either. Elsewhere, equities in China/Hong Kong got a lift from speculation of an imminent easing in monetary policy, and UK labour market data show signs of employment growth losing momentum, despite very strong job vacancies, while the hit to real wages is evident.

The 10yr Treasury/Bund spread hit 2% briefly yesterday, for the first time in over a year. That trumped a narrowing in the OAT/Bund spread, which dropped back from 2-year highs as the market concluded that the first round of the French Presidential election decreased the threat of Marine Le Pen winning the Presidency. I find it hard to believe the bond market can avoid a wobble between now and the second-round vote in just under two weeks, and that just rein forces my concern that we’ll see EUR/USD mount a serious test of 1.08in the interim.

If EUR/USD tests 108, I doubt that EUR/GBP will fall much, if at all.TheUKeconomy faces headwinds from here, as was clear from the labour market data (and yesterday’s trade figures). So,GBP/USD remains vulnerable to a more convincing break below 1.30.

The yen, meanwhile, just goes on slipping.RSIs are stressed in just about every yen cross, and I’d be happier if USD/JPY would just trade sideways for a week or two, rather than grinding higher and getting more stretched, but this just means we’ll see a decent correction at some point.

The chart plots theDollar’s real and nominal effective rates against 10-year yield differentials. The absolute level of the dollar doesn’tlook over-stretched here, and we’d want to see a turn in relative yields before turning bearish on the dollar. It’s hard to see that happening for a while.

Once the recession panic seizes equity markets and yields begin the fall, then the DXY safe-haven trade will take over. JPY will reverse up then too. That’s when to exit DXY longs and AUD shorts.

There could be big FX moves in all before then.