Australian dollar sags as US dollar smile returns

The US dollar index is rising towards critical breakout levels. It is my view that it will break out to twenty-year highs in the months ahead:

That was enough for the AUD to sag though not against BOJ battered JPY:

Oil was caned on Chinese lockdowns:

Base metals were mixed:

Big miners (LON:GLEN) fell:

EM stocks (NYSE:EEM) held on:

Junk (NYSE:HYG) lifted:

As Treasury yields fell at the long end. The 2-10 curve was crushed to within 12bps of inversion:

But stocks see only sunny uplands:

Westpac has the wrap:

Event Wrap

US wholesale inventories in February rose +.1%m/m (est. +1.2%m/m, prior +1.1%m/m).

The Dallas Fed manufacturing survey index disappointed at 8.7 (est. 11.0, prior 14.0), with a notable slide in the six-month ahead expectation measure to 8.2 from 20.6.

US President Biden announced his Administration’s proposal for a USD5.8trn Budget, with increased defence and domestic spending, although these proposals tend be watered down eventually.

Event Outlook

Aust: Our Westpac Card Tracker indicates retail sales should post a relatively strong gain in February with QLD and NSW flooding events only being a slight offset (Westpac f/c: 1.5%). The boost to national income should aid the 2022/23 Federal Budget’s focus in supporting the supply-side of Australia’s economic recovery (Westpac f/c: -$76.9bn).

UK: Net mortgage lending should soften over the course of the year as rates continue to rise (market f/c: £5.4bn).

US: January’s FHFA house prices and S&P/CS home price index are expected to robust monthly gains given the strength of demand and softness in supply (market f/c: 1.3% and 1.5% respectively). Inflation concerns are likely to continue weighing on consumer confidence in March (market f/c: 107). Meanwhile, February’s JOLTS job openings should continue to point towards extraordinary demand for workers (market f/c: 11000k). The FOMC’s Harker is due to speak on the economic outlook.

Credit Agricole (PA:CAGR) the analysis:

 

A key question ahead is whether ‘C-TOT’ can remain a dominant FX market driver or if ‘RoRo’ and the ‘USD smile’ will stage a return. With commodity prices likely to remain very elevated for now and with market risk sentiment having recovered of late (Figure 2)–potentially because investors believe that the global recovery will continue despite the above risks–a carry-over of the dominant Q1theme into Q2 should see G10 commodity currencies outperforming while the likes of the JPY and the EUR could remain on the defensive in the near term.The ‘RoRo’ and in particular the ‘USD smile’ market themes may stage a comeback, however, especially if the risk appetite that fuels demand for high-yielding USD proxies at present wanes in Q222. Among the triggers of a potential renewed risk aversion spike will be a more protracted conflict in Ukraine, worsening energy and food crises as well as tighter global financial conditions on the back of even more hawkish central banks. The developments could take their toll on global economic sentiment and risk appetite and support the safe-haven USD.Given the limited exposure of the US economy to the above headwinds and the hawkish Fed, the reign of the high-yielding, safe-haven King USD can resume in Q2. As in Q1, however, FX overvaluation and an overhang of market longs may limit any USD outperformance (Figures3 and 4).

PMIs were supported by supply-side backlogs and prices but demand was weakening fast. Equities always pretend there’s a soft-landing coming when the Fed tightens. There never is and this cycle is much more precipitous.

My base case remains the Fed breaks something in due course, DXY roars and AUD busts as equities realise a profits recession is coming in 22/23.