📈 69% of S&P 500 stocks beating the index - a historic record! Pick the best ones with AI.See top stocks

Has the Australian dollar bottomed?

Published 27/05/2022, 10:41 am
AUD/USD
-
EEM
-
HG
-
LCO
-
GLEN
-
US2YT=X
-
HYG
-
DXY
-
US500
-

DXY is looking toppy:

 

AUD is off the lows:

But, the Fed has a big problem in the oil market, which is threatening to break out:

Base metals were calmer:

Big miners Glencore PLC (LON:GLEN) did OK:

EM stocks (NYSE:EEM) too:

US junk (NYSE:HYG) is roaring, EM not so much:

Yields are falling:

Which popped stocks:

Westpac has the wrap:

Event Wrap

US GDP in Q1 was revised slightly lower in its second estimate, from -1.4% to -1.5% annualised (vs -1.3% expected), inventories detracting. Personal consumption, though, beat expectations at +3.1% (est. 2.8%, prior 2.7%). Pending home sales for April fell 11.5% (est. -7.6%, prior -9.2%), to a low since April 2020, with rising mortgage rates and affordability weighing. The Kansas City Fed manufacturing activity survey beat expectations at 23 (est. 15, prior 25).

Event Outlook

Aust: Card spending indicators suggest retail sales should sustain its strong momentum in April but weakening sentiment and elevated prices add downside risk (Westpac f/c: 1.3%).

NZ: Cost of living concerns should continue to weigh on ANZ consumer confidence in May.

China: Industrial profits will build over this year as disruptions related to COVID-19 fade.

Eur: M3 money supply growth is expected to hold steady in April, indicating ample liquidity for the economy (market f/c: 6.3%).

US: Ongoing strength in wholesale inventories indicates businesses’ desire to lift productivity amid supply-side issues (market f/c: 1.9%). Weakness in personal income is raising concerns over purchasing power but the lift in personal spending on services is a clear positive (market f/c: 0.5% and 0.7% respectively). PCE inflation looks to have crested although price pressures will only slowly abate through this year (market f/c: 0.2% headline; 0.3% core). The final estimate to May’s University of Michigan sentiment survey will confirm that consumer optimism hinges on the inflation outlook (market f/c: 59.1).

So far, this is still a bear market rally for all. But there are growing hopes the Fed will pause in September. BofA:

A tenuous but remarkable change in communication

The market is still pricing the Fed to reach a terminal at or above 3% by mid-’23, which is the scenario we incorporate in our recent rates forecasts. Yet, we have recently seen a tenuous but remarkable change in Fed communications, where some Fed officials suggest the option of downshifting or pausing later in the year as they reach 2% given the challenging macro backdrop, tightening of financial conditions, and potentially softening inflation.

Focus on tighter financial conditions and a lower neutral

Much of the recent shift in communication has likely been driven by the material tightening of financial conditions with broader metrics of financial conditions now tighter than what prevailed during the late 2018 dovish shift in Fed communication.

So much for the new Paul Volker!

But the problem is obvious. The oil chart looks quite bullish again. If the market runs on the idea that the Fed “call” is gone then energy is going to break out. All the more so as China emerges from lockdown, albeit weakly but still much better.

Any Fed pause is going to immediately intensify the energy and commodity shock as DXY tumbles. That’ll hammer growth via demand destruction anyway.

I don’t think the Fed is this stupid but I may be wrong and if so then the AUD is entering a tradable rally.

Before the Fed is forced by oil back into further tightening directly into a much worse recession in 2023.

Latest comments

Loading next article…
Risk Disclosure: 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.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.