Australian Dollar Pulversmashed
David Llewellyn-Smith | Aug 20, 2021 10:11
Forex markets are in capitulation. Fed taper is being priced and DXY running hard off a big double bottom. EUR is the reverse:
The Australian dollar is being pulversmashed:
Gold is doing OK all things considered. Oil is spooked:
But not as spooked as base metals. Copper is at the neckline of a giant head-and-shoulders top:
Big miners have jumped into a bottomless pit:
EM stocks have jumped in as well:
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Junk is rolling:
The US curve keeps flattening:
Stocks managed to rally out of weakness again but the pressure is building:
The runaway DXY is now a global inflation steamroller. MUFG has the rationale:
The key takeaway from the minutes was that FOMC members are building a consensus for commencing tapering by the end of the year. The US equity drop set the tone for Asia today and the increased risk-off is now lifting the dollar which initially failed to move on the back of the minutes. Was there anything new in the minutes to hit confidence? The timing of starting tapering of around the end of the year is the market consensus and is unlikely to have unsettled sentiment. However, the hawks within the FOMC certainly had their say and the reference to “many participants” suggesting benefits to commencing tapering “before the conditions currently specified in the Committee’s forward guidance on the federal funds rate were likely to be met”. This suggests debate took place on starting sooner and moving faster to complete tapering. Comments in recent weeks indicate we know certain members hold these more hawkish views but perhaps the surprise is that there are “many”.
So the minutes will raise some uncertainty ahead of the September FOMC meeting of action being taken then. However, the Delta variant today is certainly a more prominent risk than it was on 28th July when this meeting was concluded and hence we would expect greater caution on acting sooner than expected. The US dollar and the performance of risk assets matters quite a lot when it comes to inflation expectations and the Fed will need to tread carefully. 11 new COVID cases in New Zealand is an example of central banks abroad having to pare back their own plans to reverse stimulus and with global COVID figures rising and Asia in particular struggling, an earlier start to tapering seems an unnecessary risk at this juncture. Nonetheless, this speculation will persist and act as a key catalyst for US support with further gains likely over the short-term. The break lower in EUR/USD below the 1.1700 level is key and also means we are now close to the entire EUR/USD rally since last November being reversed–the point in time when the COVID vaccines efficacy rates were announced that prompted the strong global risk-on rally.
Because Delta risks are adding to the downside emanating from draining liquidity, rising policy risk and safe-haven buying is adding to the DXY bid. This is turning the Fed taper into a growth scare self-fulfilling prophecy.
Add the China reform program, which shows few signs of slowing, and we have the perfect storm for commodities and the AUD.
Finally, add the Berejiklian recession and what you get is what we are seeing.
An Australian dollar pulversmashing.
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