Australian dollar pulverised as commodity bubble bursts

See the latest Australian dollar analysis here:

Macro Afternoon

DXY again pushed for new highs on Friday night but failed. It remains a very bullish chart:

AUD was pulverised and broke key support. Look out below as the crosses cracked too:

Oil was bid, sadly:

Goldman’s commodity bubble is bursting spectacularly. The idea that you buy commodities as a hedge against commodities remains preposterous:

Big miners are following:

EM stocks hung on again but that chart is not promising:

As junk sinks into the Mariana Trench:

Dragging Treasury yields with it:

Which aided stocks for a night:

The US ISM was weak and the internals  even weaker:

“The June Manufacturing PMI® registered 53 percent, down 3.1 percentage points from the reading of 56.1 percent in May. This figure indicates expansion in the overall economy for the 25th month in a row after a contraction in April and May 2020. This is the lowest Manufacturing PMI® reading since June 2020, when it registered 52.4 percent. The New Orders Index reading of 49.2 percent is 5.9 percentage points lower than the 55.1 percent recorded in May. The Production Index reading of 54.9 percent is a 0.7-percentage point increase compared to May’s figure of 54.2 percent. The Prices Index registered 78.5 percent, down 3.7 percentage points compared to the May figure of 82.2 percent. The Backlog of Orders Index registered 53.2 percent, 5.5 percentage points below the May reading of 58.7 percent. The Employment Index contracted for a second straight month at 47.3 percent, 2.3 percentage points lower than the 49.6 percent recorded in May. The Supplier Deliveries Index reading of 57.3 percent is 8.4 percentage points lower than the May figure of 65.7 percent. The Inventories Index registered 56 percent, 0.1 percentage point higher than the May reading of 55.9 percent. The New Export Orders Index reading of 50.7 percent is down 2.2 percentage points compared to May’s figure of 52.9 percent. The Imports Index climbed into expansion territory, up 2 percentage points to 50.7 percent from 48.7 percent in May.”

That means the new orders to inventory measure, which is a terrific leading indicator for profits in the US economy, sank to a new low. Moreover, the regional surveys are pointing the same way:

The US economy is already in recession and it is going to get worse:

Is it any wonder industrial metals are crashing?

I did warn you. The mania for commodities through Q1 was a typical blowoff top led by the Great American Bubble Machine and Zoltan the Magnificent. Now the madness of crowds is stampeding through the narrow exit.

It’s all “oversold” so some kind of bounce will happen eventually but, equally, it is still overpriced, so expect lower prices yet. This is classic commodities “up the escalator and down the lift” stuff as the cycle overwhelms any and all structural drivers (of which I remain quite skeptical as well). That it was a bubble is pretty clear:

  • Prices inflated as fundamental demand drivers in China collapsed. Now those demand drivers are rebounding yet prices are crashing.
  • I haven’t run the vol numbers but it was clearly a 6-sigma event for material like nickel.
  • It ended with grand declarations of a “new paradigm” and “permanently high plateau” for prices. For instance, Zoltan the Magnificent actually argued that there was an air shortage.

I don’t think that the commodity bust ends until the Fed pivots which can’t happen until oil is also flushed. Below $80 is my target. This will set us up for the perfect post-Spanish Flu 1920/21 deflationary bust repeat in 2022/23.

While this goes on, pressure on the AUD will obviously persist.

Houses and Holes
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Comments

  1. How does one position themselves for deflation? Buy USD assets and hope to win on the foreign exchange fall?

  2. pfh007.comMEMBER

    68 cents is pulverised?

    Luxury!

    When I was a wee laddee we would go to bed at 48 cents and be making movies and automobiles by breakfast.

    • TailorTrashMEMBER

      Aye you were lucky ….back when ah were a lad
      pulverised and plunge ( house prices ) had meaning
      ……must be language inflation

  3. Grand Funk RailroadMEMBER

    I must confess I am one of those who still thinks we may see HnH’s ancient call of an AUD with a 4 handle at some point in the road ahead

    • pfh007.comMEMBER

      When China finds a new supplier for our dirt we might. Our dirt and crops are keeping the AUD afloat.

      People are forgetting that our dollar reflects we are running a trade surplus AND current account surplus.

      We would not get away with ZIRP and keep a currency above 50 without it.

      • ErmingtonPlumbingMEMBER

        When we were in the 50s in early 2000s thats when we were selling lotsa Commodores to the Yanks.
        Ahhh the good old days of 50c to the US dollar

    • I too think it is out there somewhere…
      Too much of a divergance between RBA and FEB plus a commodities collapse might be the recipie.

      • boomengineeringMEMBER

        nyleta.thanks.
        Looking at the chart you would think there is room to move on the upside but a graph dating back 100 years would be good as there hasn’t even been a recession since 2018 to get a proper picture.

  4. My daily Aussie commodity price index is down 12.5% since end May with the terms of trade index down 8.8%. Met coal is under intense pressure but the index hasn’t really felt the full force of correction because of energy, gold and iron ore, which are yet to crack.

    Will be interesting to see if gold spits the dummy. My model suggests it should be down to around 1550, its been remarkably strong.

      • At 1550us, and aud 40c, gold would still be tracking 2500-2600 aud
        Good for a little hedge, but I’m not putting the house on it.

        • Guys you all do the same thing over & over
          You get more & more bearish the lower something goes & it tends to be a turning point
          This site has been saying the AUD is beaten pulverised & it feels like ground hog day
          You were saying the same thing 9 months ago when it was 6950

          US & the world is in recession
          Inflation expectations are cratering (forget CPI it’s a lagging indicator)
          Sentiment & positioning is at extreme bearish levels last seen at the 09 low & March 2020 low

          AUD overall is heading much higher, it’ll be 80 before 60

          This site said iron ore was going to 0 when it was 90 & climbed back to 150

          Same with FMG was $13 went back above 20

          It’s just a fact of life, that most are bearish at the low & bullish at the high

          It’ll never change

          • RomulusMEMBER

            Not going to happen re AUD at 80c before 60c. Inflation and therefore rates are going to keep rising.
            Q4 is going to be a doozy when it comes to oil/gas prices. Aside from Northern winter & the recovery post hurricane season in the US – there are midterms and both Russia and Saudis want Republicans in power. There are more sympathetic voices to both countries in the GOP and they are going to be spiking oil prices around that time to ensure maximum damage to Biden/Dems.
            Still sticking to your $300/tonne iron ore price? What timeframe?

  5. Mike Herman TroutMEMBER

    DLS has stuck to his guns with his deflation call. About to be proved right it looks like… h/t

    • One could make an argument either way
      It all hinges on the US central bank.
      They want to continue to raise rates, but will the markets let them.
      I would keep an open mind.

  6. ErmingtonPlumbingMEMBER

    Taking the above into consideration.
    I’ve got over 150kgs of scrap Brass and copper.
    When will be the best time, over the next few months, to flog this off to my scrappy?.