Australian dollar slain as markets capitulate

See the latest Australian dollar analysis here:

Macro Afternoon

DXY is still poised for higher as markets capitulate to the coming global recession:

AUD was slain, breaking post-COVID support:

Oil gave in:

Metals have now erased Ukraine. Global recession next!

Miners were flogged:

EM stocks are into free fall:

Tracking junk:

Yields fell but there was a bear steepening:

As stocks obliterated support:

Markets are beginning to price the coming global recession. Ironically, this will guarantee its arrival as it drives a hiccup in US consumption which will spill over to China and Europe via trade landing on already weak economies thanks to the war, energy, OMICRON and property shocks.

This is the macro backdrop. However, it is not the proximate driver of the AUD crash. For that we look to China and the CNY:

Why is the CNY falling so fast? It’s a classic case of “at first slowly then all at once” as markets realise China is a nasty risk in geopolitical, trade, policy and growth terms.

And, of course, the Fed is killing it:

  

Or, rather, the Fed is exposing China’s impossible trinity of trying to control interest rates, currency and capital flows all at once. Its still trying to slow the currency fall down:

Lest it depletes more foreign currency reserves and lose control completely:

I don’t know if China will end up in a classic EM currency crisis before this move is done. What we can say for sure is that a falling CNY is spectacularly deflationary for the world as it:

  • destroys DM and EM competitiveness;
  • lifts domestic manufacturing and commodity competitiveness, and
  • when accompanied by a hawkish Fed, delivers a bowel-shaking shock to EM external accounts.

For markets that are primed for inflation across the board, a massively deflationary CNY shock is entirely on the wrong side of the boat.

Where CNY goes, AUD follows.

Houses and Holes
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Comments

      • Could well be, but this is in the short term…..options plays are all negative until the 20th……. What happens after the asset deflation is what we want to know. Brainard was confirmed as Fed Vice chair on a vote on strictly party lines, which has never happened before. This does not bode well about what happens if the recession goes deep on top of a new wave of Covid. Think about another $ 2 trillion issued at 2% instead of the zero bound to hold up their seat levels in the mid term elections in November. Of course the TGA is pretty big again with tax payments for a while but 6 months is an eternity at the moment.

  1. DingwallMEMBER

    Deflate equities ……done ( no one wants to play anymore )

    Hopefully further and longer tbf ………. as it needs to flush out the huge, exuberant cohort who seem to think things only ever go up and this is just BTFD …….. again.
    The market normality needs to return with all the lessons in pain…… margin calls etc

    • GeordieMEMBER

      If you want it to have any lasting effect we need it to get bad enough to destroy some of the debt as well, clear out enough zombie companies to give the survivors room to try or die.

      The whole financial and corporate system needs a thorough flush and a couple of scoops of Draino to go with.

  2. Muttafukaburrasaurus.MEMBER

    It’s a mess.
    Not sure when to buy calls but they’ll be 4-6 months expiry at least. Politics/ fiscal is the decisive driver of markets, and the only issue I can see that both Dems & Reps might agree upon to throw enough stimulus to reinflate sentiment is war preparations.
    Go long death.

    • Probably not too much lower. Looks like all the capitulation is over in the bond market now, should see long end bond yields fall. 3.60 should hold on Australian 10 year. Most missed this move from under 1% to 3.60%, most long bond holders have now exited
      On every sentiment metric sharemarket is heavily oversold.
      Saw an excellent lady on Bloomberg yesterday, she was an equity portfolio manager in the US, she said we would have a final few days of sharemarket selling capitulation & she said they were starting to buy, she was at one of the big investment houses & said her favourite currency here was the AUD
      Remember the sharemarket is a discounting mechanism, all these rate increases are now factored in, US CPI out tomorrow, UBS has said we should see CPI peak from this month.
      Have a look at AAII bull bears survey & the investment manager survey, they are at bearish sentiment levels equivalent to 2009 low, even more bearish than March 2020 pandemic low
      Don’t also forget how much many stocks have been sold off, small tech some more than 80%
      This selling has really come from the inflation & the aggressive & steep rise in yields, look at US 2 yr, it’s just a vertical line up since august last year, that run has mostly been done – Fed may raise but the bond market has front run the Fed by 6 months – look at the bond markets they are way ahead of the Fed

      I like AUDUSD here, think it’s a great buy & I like Nasdaq too, things are very beaten up & @geordie I’ve heard there have been big margin calls in the sharemarkets triggered & big selling stop losses

      The commodity super price boom is just about to get started again & iron ore $300 is now well in sight

      I’m throwing an iron ore $300 party when we get there, still think it’s a possibility that we could see $500 iron ore in the next 12 months but let’s hold off on that one may be a reach

      Re the AUD you guys always get caught up in the momentum, when we hit the low you get bearish, you should be buying into weakness & selling into strength, AUD really hasn’t gone below this level for the last 6 months, the bad news is already factored in. There will be buyers in the high 69s

      The commodity price super boom should support the AUD

      • turvilleMEMBER

        Industrial metals have come off some 30+ % so maybe the “super boom” is actually over. simply cannot see your $300 or $500 iron ore targets being tested in my lifetime. More likely see sub $100 this calendar year unless China really gets out of jail with it’s domestic problems which are significant.

      • Them’s some ballsy calls Bcnich.
        – Iron Ore at $300? Did you misplace the decimal point?
        – Aussie dollar to go UP as our housing market finally hits the Icarus apogee?

        Sure, stocks could do anything. It’s volatility central. But either we’re going to have a massive supply chain crisis continue to drive stagflation, or we going to have massive demand destruction caused by ratcheting rates, margin calls and rehypothecation daisy chains imploding and firing contagion into every dark corner

    • turvilleMEMBER

      I have traded and acted as an intermediary in the A$ currency market since 1983. have seen circa 50c and circa 1.09 in that time and with much greater day to day volatility than of late. An Albo Labor govt (punters pick I guess) may signal a weaker trend towards 60c or lower. V good for our mountain of exports and those who have suffered during the pandemic (wine – tourism etc). Timeframe 3-6 months and RBA may go soft on rate rises with a weaker currency and the steam coming out of inflation quite quickly

  3. UpperWestsideMEMBER

    Have to laugh,
    the 2X Short AUD ETF “CROC” just shutdown 3rd May,
    Morgan Stanley didn’t have it as news on their trading app so I missed closing out.
    You get your cash back on the 12th, so Murphy will probably bottom tick the AUD, close of business 12th May!

    • boomengineeringMEMBER

      Remember to give feedback. Any motivation is good motivation.
      Back in the day I always used to get young guys come to the gym to beef themselves up to retaliate against a bully. After a couple of weeks of hard training they were too tired to bother with the bully, gained self esteem and continued a healthy lifestyle.

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