Australian dollar crushed under US megaboom
David Llewellyn-Smith | Feb 28, 2024 09:36
DXY is easing:
North Asia is a lead weight:
Oil is creeping higher:
Dirt yawn:
Miners held on:
EM yawn:
Get The App
But EM junk is still risk bullish:
Yields rose:
Stocks firmed:
Not much to report in dataland. Goldman has neat discussion on DXY:
FX has been trapped in a narrow range.
US data have been even stronger than our robust expectations, and both markets and Fed speakers have evolved to acknowledge there appears to be no rush to ease policy.
In our view, the most important and potentially sustainable aspect of this evolution is that Fed officials now seem less convinced that the risks around their dual mandate are becoming evenly balanced.
If that further evolves to a more careful discussion around the neutral rate, we could start to see a similar dynamic to the last cycle where the impact of rate hikes on FX was dampened by a smaller overall hiking cycle.
This time around, that would work in reverse if the Fed couples rate cuts with a mention of a higher neutral rate, which would limit the Dollar’s potential downside.
However, as we have been writing for weeks, we mostly see this as validation of our view that the Dollar’s high valuation is likely to be eroded only slowly, and USD returns will provide a high bar to beat throughout 2024.
And, in the near term, excessive spillovers to global fixed income markets curtail the FX impact in the spot market (with some exceptions for more duration-sensitive currencies like the Yen).
More pronounced FX shifts will require cyclical divergence to translate into policy divergence, which will likely only emerge when policy moves are more imminent.
Although we think the current backdrop is broadly Dollar-supportive, it is not enough to take us away from our baseline expectation of a modestly weaker Dollar over time.
But we see a plausible case for a stronger Dollar in scenarios that are not too far from our baseline, especially when policymakers’ reaction functions are still under review.
I’m not sure I see the need to lift the US neutral rate. The unfolding productivity megaboom in AI, health, energy and transport is more likely to lower it given productive capacity will lift.
But I agree the US is the place to be, and that does not appear to be slipping away any time soon.
Which is a lead weight sitting on AUD.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.