Australian dollar crucified as yuan nailed

See the latest Australian dollar analysis here:

Macro Morning

DXY is blasting to the heavens as EUR sink to hell. When will it end? Ask Vladimir Putin:

AUD is being crucified:

Oil won’t break and until it does everything else will instead:

Base metals have gotten the memo:

Big miners also:

EM stocks and junk are leading the way:

And it appears to be finally blowing back from periphery to centre as Treasuries rally:

But stocks are struggling to follow as recession risk rockets:

Westpac has the wrap:

Event Wrap

US PPI in April was slightly firmer than expected, the headline measure up 0.5%m/m (est. 0.5% m/m) and 11.0%y/y (est. 10.7%y/y, prior revised to +11.5%y/y from 11.2%y/y). The core measure rose +0.6%m/m and 6.9%y/y (est. +0.6%m/m and 6.5%y/y, prior 7.1%y/y).
The results support the likelihood that peak inflation occurred in March. Weekly initial jobless claims of 203k were above the 193k estimate, but continuing claims were slightly lower at 1.343m (est. 1.68m).

UK production data was soft, with Q1 GDP of +0.8%q/q (est. 1.0%q/q). In March, industrial production fell 0.2%m/m (est. flat), services fell 0.2%m/m (est. +0.1%m/m), and the trade deficit widened to -GBP23.9bn (est. -GB18.45bn).

Tensions increased in Europe, as gas pipelines through Ukraine remained disrupted. Sweden will submit an application on Monday to join NATO, with Finland’s formal decision to do so expected on Sunday.

Event Outlook

Aust: RBA Deputy Governor Bullock will participate in a panel at the Regulators (2022) in Sydney.

NZ: The manufacturing PMI has remained on a solid footing but businesses still remain cautious.

Eur: Supply pressures will continue to be a headwind to industrial production in March (market f/c: -2.0%)

US: Import prices are expected to hold at an elevated level in March (market f/c: 0.6%). Inflation and rate concerns will likely remain at the fore in the May University of Michigan’s consumer sentiment survey (market f/c: 64.0). The FOMC’s Kashkari and Mester are due to speak at different events.

There are lots of reasons for why the AUD is falling so fast:

  • rising global recession risk;
  • risk off;
  • DXY to the moon;
  • commodities crunched;
  • an uncertain election.

But, I put it to you, there is one factor that is head and shoulders above all of these and it is this, a collapsing CNY:

Markets hate a falling CNY. The AUD in particular hates it:

  • Chinese competitiveness rises against all EMs just as the Fed sucks liquidity away from the same.
  • Chinese domestic commodity competitiveness rises.
  • Chinese rebalancing goes into reverse.
  • China sells Treasuries and imposes capital controls to contain CNY falls, draining more liquidity from DMs and EMs.
  • US/China Cold War 2.0 tensions rise.

This time around, Chinese domestic demand is so weak owing to OMICRON and the property crash that we have the added specter of an external crisis in that country that overshoots CNY as an export shock arrives.

Ironically, only the Fed can turn this around but it can’t pivot until inflation is licked and that means breaking oil.

In a sense, having driven the AUD up with his war and commodity prices, our Vlad is now destroying it.

Houses and Holes
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Comments

  1. C.M.BurnsMEMBER

    Sweden and Finland (likely) both applying to join nato, and his botched war in Ukraine might only deliver him a portion of the country due to sustained military incompetence

    What a spectacular own goal by Trump’s idol. That isn’t just shooting yourself in the foot, that is taking careful aim at both legs below the knee and blasting away with a 12 gauge.

    • Ronin8317MEMBER

      NATO troops were already training in Ukraine : if Putin doesn’t respond, Russia lose Crimea. War is inevitable. Going after Kyiv was a mistake though.

      The war will last a long time, Ukraine will look like Afghanistan when it’s over.

      • TRADINGtheAPOCALYPSE

        Lol the whole NATO fault thing getting very old. Was Russia aggression in Chechnya Natos fault? Invasion of Georgia.. Natos fault? Kazakstan.. Natos fault? Syria.. Natos fault also?

        One thing we can all agree on is that it’s definitely Labors fault.

        • Ronin8317MEMBER

          Georgia invaded South Ossetia during the Beijing Olympics, then got crushed. NATO is much better prepared this time.

          Look at history on what happened to the Ottomon Empire : the same thing is happening to former USSR. With geopolitics, some things are inevitable. NATO will not stop until Russia becomes a failed state.

          • TRADINGtheAPOCALYPSE

            Well IF it is NATOs fault.. they’re then the greatest military defensive pact of all time..

            They haven’t fired a shot and they’ve coaxed a rival into catastrophic military defeat at the hands of, and on the turn of, a non-nato country. Ukraine is a nation that Putin (derangedly) considers a part of Russia. So, if true, NATO has convinced Russia to attack ITSELF and is weakening itself economically and militarily in an attack on its own people.

            Vale the hive mind at NATO for its genius geo-strategic planning.. I think.

          • Yeah, NATO is second only to the USA in it’s ability to control foreign governments & peoples minds to get them to do what they don’t want to do.

            Putin might fall sooner than we expect, he has apparently sacked or arrested a bunch of his top generals (though could be propaganda) even the new top one that got shrapnel in the leg & didn’t appear at parade. Then there in the fact no plans flew at parade, which was blamed on a fire at a base, which doesn’t ring true to me, or it was sabotage. Then recently they suffered their worst loss in a single day (new howitzers etc?) trying to build a pontoon bridge, which won’t help moral or unity of generals & Putin. Though I think more likely Putin will double down eg thermobaric bomb or chemical attacks, as a final attempt. What will be the impact on markets, international relations, NATO reaction etc if he does,

          • lol on the failed state thingy; it will be a nuclear conflict before Russia fails and then we’ll all be in the same boat; fvked!

            I don’t claim any geo political knowledge, but aiming to cripple Russia militarily or financially so as to collapse the country is foolhardy to say the least and any pollie or military person who thinks they can pull it off is just as dangerous as Putin.

            Zulu, low cloud at the time is what I read for the cancellation of the flyby.

  2. Inflation is already peaking & bond yields have peaked & rolling over.
    Under the extreme risk off markets, the AUD hasn’t really fallen much.
    You guys all make the same mistakes over & over
    You get caught up in the momentum, you are in a crowded trade
    On every measure the market is the most bearish & in extreme fear
    This is why you always miss big turning points
    Everything is extremely oversold & most of the capitulation has happened already
    The big one you are missing is US economy is going off a cliff & the FED is going to pivot
    High US bond yields, double mortgage rates & double gasoline prices, & high inflation have severely slowed the US economy
    This is the mistake many make, get more & more bearish the lower the market goes & become extreme bearish at the very low when they should be taking their foot off the gas as positioning & sentiment becomes extreme on one side & we are very close

    This is why they say the majority are most bearish at the low & most bullish at the high

        • The Travelling PhantomMEMBER

          Well what will be his position if the recession DLS and bcnich talking about will hit Australia? If he’s not aware how’s he a CEO? And if he knows he’s misguiding people

          • What else can he say. Guess he knows the RBA will be forced to ease again after a couple of hikes as everything falls apart. There aren’t going to be anywhere near the hikes they are saying
            Might get to 1 to 1.5% cash rate & it’ll be QE again with rising inflation again
            The Fed will be lucky to get one more hike before they pivot.
            Easing is coming again not too far down the track
            Markets will move in anticipation back to risk on
            Watch the bond market, interest rates are already falling

            The risk off capitulation in the markets is nearly done, it was a reaction to the US 10 year hitting 3.20% & now it’s 2.85 & falling back to 2.50

            This is all just one big merry go round

            Property has had its day & is rolling over regardless of rates. The banks won’t survive 2023. We will have some new structure, who knows what it is

      • Absolute BeachMEMBER

        He might be correct, but what he is really saying is: go out and spend cos everything is rainbows and unicorns. Don’t frighten the horses. Meanwhile, watch him liquidate into cash and wait to snap up the bargains. I would.

      • I often write a few comments around sentiment readings but I see everyone on here just gets caught the wrong way. Take it for what it’s worth, I think it’s wise to be aware that many indicators are pointing to the risk off move is nearly over.
        I was asked to write a few comments & it’s not personal for me. It’s everyone’s choice what they do.
        I just wanted to highlight & actually want to help
        I have no other interest than trying to help where I can

        • Keep it up please bcnich – the contrast is worthwhile & the more eyes in the camp, the better. You’re right on breadth of bearish sentiment being near lows, but the indexes could still work lower even though they’re already well OSold. TLT hasn’t really bought into it as might be expected, although Yen might finally have. I’m still wary of the small selloff in S&P500 leverage being over – dependent on any Fed flip I guess. VIX looks like it might have another imminent swing up in it too… maybe one last hurrah next week or so for it….?

        • Yes, keep comments coming, even though I don’t agree with you, good to hear opposing views, though you are right about a lot of things especially win people are most bearish.

      • They don’t need to break oil, the Fed does not target it and inflation is made of a lot more than just oil. Sure it is an input to a lot of stuff but if all that stuff is deflating it will counter it. What’s more oil is going sideways anyway and unless it breaks upwards from these levels it will no longer add to inflation. With the world going to sh1t I don’t think oil demand has the ability to go higher.

    • Evan Eveanton

      You called the AUD turning point a few months ago but it was only a short term bounce and we’re back to grinding lower. I think you could be right on another short term bounce, but I can’t see your big picture play coming off in any timeframe that’s useful for investing..

      China based supply chain issues will remain until the party conference where they might find a way to pivot from zero covid.

      The Fed isn’t in the same position to pivot as in 2019. They have to be seen to be addressing inflation, which even if it levels out for 6 months, is too high a political cost for Biden admin. 2019 had Trump wielding Twitter as a weapon to drive the market higher…now we’ve got Democrats facing midterm annihilation.

      The drop in crypto would be delighting the Fed. They’d love to drive a stake through crypto markets and bury them (at least for a couple of years). If the Nasdaq grinds lower in a relatively ordered descent and crypto ponzies are blowing up with BTC dropping – they’d have to be tempted to let it burn longer.

      When there’s a real problem in the treasury or credit markets then they’ll be forced to move…but as far as they can grind the speculative assets lower before that happens, the happier they’ll be.

      • Mike Herman Trout

        I think you’re bang on Evan. Inflation is a political issue now. The US population can feel it and they are unhappy. The pivot last time occurred at attire when inflation was not a problem. While the inflation reading was slightly lower, it does show that it is becoming entrenched. Nominal rates are -7.5% or something. There’s no way they are pivoting before that’s under control. The credibility of the Fed itself is on the line…if they had any left…

    • Problem is risk cannot be accurately evaluated until the counterparty dance plays out. 20% zombie companies are going to take some unexpected players with them.

    • ErmingtonPlumbingMEMBER

      “Chinese policy had changed to pro-labour, which restricts the returns Chinese corporates can generate”

      Why is restricting the amount Corporations can gouge out of an economy bad for “average people”?

      Sounds like your all for Australia’s Gas cartel price gouging Australian citizens to access their own Gas and other such disgraces.

      • Muttafukaburrasaurus.MEMBER

        Look at China as a model.
        A communist state that has no state support services for the unemployed, elderly or other vulnerable persons.
        It’s no longer even pretending that communism is a ‘workers paradise’ it’s a authoritarian control structure that has no regard for the individual whatsoever.
        I’m pretty sure that developed nations who moves towards socialism will also be more concerned with control of individuals rather than support for them.
        I’m all for a better/ fairer re-distribution of wealth, CCP and it’s neo- socialism is a facade in this regard.
        Central control is paramount to CCP’s survival, it’s crushing its internal (quasi- free market) rivals first… our turn will come.

      • ““Chinese policy had changed to pro-labour, which restricts the returns Chinese corporates can generate”

        I don’t Michael Pettis agrees with that, from what I can take of his twitter posts it’s where they need to go, from business to household, but it isn’t happening according to him.

      • Muttafukaburrasaurus.MEMBER

        Yeah I take it as his long term outlook (decade +).
        CCP is also unlikely to actually be pro-labour, how can it be when 9am to 9pm 6 days a week is an acceptable feature. Common prosperity is just the rhetoric around the facade I feel they are likely to adopt.
        If the CCP can increase their ability to stabilise or disrupt commodities as suits their purposes, via stockpile or ownership/ control of mining tenements, resource companies, ports & shipping or other key logistical infrastructure.
        What can a profit driven organisation actually do to remain competitive?
        It then becomes a Governmental level issue, and likely evolves into further state involvement and/or ownership of global assets.
        Markets have more chronic illnesses than just stimulus addiction.

    • The world economy is still addicted to credit creation and consumption, which is at first a bit inflationary and then heavy and disinflationary, and even deflationary.

      The Chinese will no doubt develop the same addiction (they already have it in some ways), and the developed world already has it.

      I’m not sure rising Chinese wages can combat that, plus increasing automation of industrial process, plus improving (more efficient) tech.

      I think the guy’s thesis is too narrow, and therefore comes to the wrong conclusions – I think more forces are pointing to the deflationary in the longer-term/secular.

  3. Our major competitor has just put in an order with us as they cannot get anything out of China.
    This next wave of inflation is going to be huge…..diesel at $3.00 here we come

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