Australia dollar firms as oil slumps

See the latest Australian dollar analysis here:

Macro Morning

DXY held its gain last night:

AUD rose anyway as Taiwan tensions eased:

Oil broke. Big downside potential here:

If so, metals will go too:

And miners:

EM stocks were OK:

And junk bounced:

The yield curve was smashed:

But nothing gets in the way of stocks:

Westpac has the wrap:

Event Wrap

US services activity (ISM) rose to 56.7 (est. 53.5, prior 55.3), with stronger than expected new orders and production. This contrasts with the recent declines in manufacturing surveys, although industry comments still indicate concern about slowing economic activity as rates rise and demand moderates.

Factory orders in June rose 2.0%m/m (est. +1.2%m/m, prior +1.8%m/m). Durable goods orders were finalised slightly higher at +2.0%m/m (from 1.9%m/m initial reading).

FOMC member Bullard said the funds rate may need to be higher for longer in order to bring down price pressures, and that the Fed is going to be “tough” and will get inflation back to 2%. He felt it will take a while for inflation to ease. Barkin said: “there is a path to getting inflation under control. But a recession could happen in the process. If one does, we need to keep it in perspective: No one cancelled the business cycle”. Kashkari said: “we are laser-focused on getting inflation down, and whether we are technically in a recession right now or not, doesn’t change my analysis. I’m focused on inflation”, also deeming rate cuts in 2023 “very unlikely”.

Eurozone services PMIs were finalised slightly higher, with the pan-Eurozone reading edging up to 51.2 from the flash 50.6, the composite measure at 49.9 from the flash 49.4. Concerns over a cost of living related fall in demand more than offset reduced pricing pressures and worries about energy supply and prices. Retail sales in June reflected the weakness seen in German sales on Monday, falling 1.2%m/m (est. flat, prior revised to +0.4%m/m from +0.2%m/m), with y/y sales declining to -3.7%y/y (est. -1.7%y/y, prior +0.4%y/y). Eurozone PPI in June rose 1.1%m/m (est. +1.0%m/m), for a rise of 35.8%y/y (prior 36.2%y/y).

Event Outlook

Aust: The trade surplus is expected to remain elevated in June although a consolidation of exports and a lift in import value should see a slight narrowing (Westpac f/c: $14.6bn).

UK: The Bank of England is set to hike the bank rate by 50bp to 1.75% at their August policy meeting in order to quell inflation pressures.

US: The trade deficit is expected to remain wide in June (market f/c: -$80bn) and initial jobless claims are beginning to slowly lift from historic lows (market f/c: 260k). The FOMC’s Mester is also due to speak.

The Fed is desperately trying to stop the stock market reflation and failing. This raises the prospect of stronger hikes ahead even as commods come apart.

Meanwhile, Australian data is fading fast and the RBA is going to have to stop hiking in short order.

AUD downside potential is obvious.

Houses and Holes
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  1. MBIE( New Zealand has innovation and enterprise) weekly fuel price monitoring in New Zealand down 18 percent since start of third quarter. Australia must be seeing similar.

  2. Atom Heart MotherMEMBER

    The Fed is desperately trying to stop the stock market reflation and failing. This raises the prospect of stronger hikes ahead even as commodities come apart.

    Meanwhile, Australian data is fading fast and the RBA is going to have to stop hiking in short order.

    AUD downside potential is obvious.

    And that in a nutshell is the outlook.

    The recent MacroVoices Pods have all referred to the US Strategic Petroleum reserve being run down at a time when it would ordinarily be accumulating. Given the central role in the US economy this potentially lays the groundwork for the Fed continuing to lift long after Commodities come apart, simply because fuel will be higher – against the backdrop of the risk that Putin will generate crude price spikes to go with the gas ones, and the self-inflicted sanction related price spikes brought about by the response to Russia. Him doing that would almost certainly be in the interests of the other OPEC+ members (currently producing at close to capacity and seemingly disinclined to produce more). Indeed the most recent MacroVoices pod………

    Had a gent positing quite plausibly that we are in the early stages of a global energy shock brought about by a decades worth of lack of investment in hydrocarbon exploration, in the context of renewables being at real risk of not being able to make the step up to meet demand. Erik Townsend is into it too.

    So as a number of people have posited it will likely be a stagflationary environment – low growth and higher than anticipated rates. My guess would also be that demand destruction required for oil will potentially bring us to demand destruction for jobs, and from there higher unemployment to go with it.

    In Australia – home of an economic bubble which has revolved around selling houses to each other at ever increasing prices, off the back of commodity sales – the VVP, and potential energy shock (even if you don’t agree with that guy there is plenty to listen to) – would logically (to me) take us on a voyage to lower commodity prices (brought about by demand destruction and geopolitics), forever lowering the pants on Australia’s sweaty bumcrack economy and its underlying competitive position, and ultimately onto unemployment, social discontent, and arriving at the Federal budget just in time to catch the pike position of commodity revenues, and governments (which refused to spend to take advantage of lower rates for a decade) ultimately unable to meaningfully spend (or telling themselves they are unable to) and hoping the RBA will do something about lowering rates to generate whatever juice can be extracted from a petrified economy and praying for house price growth (post implosion) to look like a healthy economy

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