Australian dollar drunkest bum at global party

See the latest Australian dollar analysis here:

Macro Afternoon

DXY eased on Friday night:

AUD was the drunkest bum at the global party:

Sadly for all, oil took off:

Happily for all, metals kept falling:

Miners popped anyway with the stocks pop:

EMs tocks avoided a new low in this leg of the market convulsion:

Junk spreads were not impressed:

Treasuries were sold:

But stocks partied anyway:

Credit Agricole has the wrap:

Fears about a global growth slowdown have been haunting currency markets for several months now, forcing investors to ‘war game’ the FX impact of the next economic downturn. Given that the primary drivers of the economic slowdown have been the global commodity terms-of-trade shock, the recurrent pandemic and the war in Ukraine, the biggest losers so far this year have been the JPY and the EUR as well as other European G10 currencies. More recently, as recession fears have worsened and weighed on global commodity prices, G10 commodity currencies like the NZD and AUD joined the selloff as well. We further note that, as a result, all of these currencies have moved deeply into undervalued territory vs the USD according to our long-term fair value gauge G10 FX VALFeX.

The US economy has been slowing down as well and this has fuelled market expectations that the Fed reached ‘peak hawkishness’ at its June policy meeting. Despite that, for many investors the USD remains the king of G10 FX given that the currency has started attracting safe-haven inflows more recently. We also note, however, that past US recessions have triggered repatriation flows into funding currencies like the EUR, CHF and JPY while the Fed tended to ease aggressively in response to US economic downturns over the years. All this meant that the USD tended to underperform most G10 currencies during three out of the last four US and global recessions since 1990.

Focus next week will be on the prospects for further aggressive central bank tightening and its detrimental impact on the global growth outlook. In particular, evidence that Eurozone inflation accelerated further in June together with signals at the Sintra central bank symposium that the ECB is committed to containing inflation while shielding the EGB market, can boost the EUR’s safe-haven appeal. In addition, the US PCE data should confirm that core inflation is peaking while activity, ISM and consumer confidence data could point at further darkening of the US economic outlook. The USD could continue to attract safe-haven flows if risk sentiment remains shaky, however.

Clearly, markets are hoping we’ve passed peak Fed hawkishness so they are bidding on growth stocks and forex.

There are still some rhinoceros-sized flies in this ointment.

The lifting oil price is a big problem for Fed hopes though there is encouragement in the bifurcation of commodities as metals keep falling.

There is also the problem of EPS forecasts for stocks, which have not come down yet at all.

I can’t help wondering that, at a certain point, falling yields should be joined by falling oil and falling stocks.

Bad news is not good news if you’re headed into recession and demand plus earnings are about to be trashed. Not even for growth stocks.

For me, then, this is another rally in the AUD and broader risk to be suspicious of.

Houses and Holes
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