Australian dollar free falls as greenback rises

DXY is surging off support that has held as EUR plunged:

AUS is following EUR:

Commodities will not be able to withstand a higher DXY:

Miner held on as iron ore mysteriously popped:

EM stocks fell:

Junk too:

Treasury yields rose:

Stocks eased:

Credit Agricole mulls the rise of the greenback:

• One recurrent topic in recent client meetings has been whether the USD smile is still a reasonable approximation of FX price action. In particular, many clients have noted that the USD’s appeal as a high-yielding safe haven has been tarnished by the latest banking sector turmoil and the debt ceiling debacle in the US, both of which have fanned concerns about the economic outlook there and fuelled Fed rate cut expectations.
• Furthermore, the lingering tail risk of a US banking crisis has led some investors to price in aggressive emergency Fed rate cuts. Some clients also believe that the overhang of USD carry trades that dominated FX price action in 2022 has made the USD vulnerable vs hitherto funding currencies like the CHF and EUR, which have become viable higher-yielding, safe-haven alternatives to the USD since then.
• We doubt that the latest developments in the US have sounded the death knell for the USD smile. In particular, we think that the latest banking sector problems will not grow into a systemic threat to financial stability and the economy, in part because of the continuing Fed liquidity support. Our FX positioning data further suggests that stale USD-longs no longer cloud the outlook for the currency, with FX investors seemingly having recently built significant EUR/USD longs for example.
• In addition, a potential extension and/or temporary suspension of the US debt ceiling in the coming weeks could encourage rates investors to pare back some of their Fed rate cut bets and further allow the US Treasury to rebuild its cash position through more debt issuance. In turn, this could lead to a drain of USD liquidity and even fuel USD scarcity. Conversely, a potential failure to reach a debt ceiling compromise may aggravate (global) recession concerns and boost the USD safe-haven appeal, especially vs risk-correlated G10 currencies.
• Many negatives seem to be in the price of the USD as the currency remains ‘stuck’ at the bottom of the eponymous smile. However, it would take (1) an improvement in the outlook for US regional banks and (2) more clarity on the debt ceiling to see US rates recover and the USD smile yet again in the near term.

That makes sense within the consensus soft-landing trade. My own is more bearish with the US headed into an H2 recession, intensifying bank bust, and rising DXY on safe heaven flows.

So, it is interesting to note that whether bearish or bullish on event risk and growth, there are good bullish arguments for a rising DXY in H2.

And a falling AUD.