Australian dollar plummets in global recession
DXY erupted last night as Russian missiles rained down on Ukraine. The EUR is toast:
The AUD exploded and then exploded with Russian bombs. The plummeting cross of the EUR is something else:
The markets chose death by commodities:
Emerging market stocks were crushed:
As EM waste rushes into the abyss:
The bond offer roared:
Which limits declines for growth but equities fall:
Westpac has packaging:
The German headline and harmonized January CPI pushed above estimates. Harmonized CPI increased to 5.5%y/y (before 5.1%y/y, est. 5.4%y/y) with headline CPI at 5.1%y/y (before 4, 9%)
Italy’s January CPI rose to 5.7%y/y (from 4.8%y/y) and evened out to 6.2% (from 5.1%y/y, est. 5, 5% a/a).
The final Eurozone manufacturing PMI in February was reduced to 58.2 from the Flash 58.4.
The final UK manufacturing PMI for February rose to 58.0 from the Flash 57.3.
The US manufacturing ISM for February was strong at 58.6 (est. 58.0, before 57.6) with an increase in new orders. Employment fell slightly, although remained positive while prices moderated, instead of the expected further rise, but remain at very high levels.
Australia: Q4 GDP will be published. A rebound in activity is expected as restrictions ease and economic conditions improve. The support of consumer spending and public demand should be slightly offset by the weakness of housing construction; uncertainty around the consumption of services is present. Westpac’s forecast of 3.3% is broadly in line with the market median.
New Zealand : Become thin building permit should remain stable in January, with monthly emissions remaining at firm levels. Soaring import prices higher than export prices should terms of trade down in Q4 (Westpac f/c: -3.0%).
Europe/UK: Rising energy prices are expected to remain a key driver of consumer inflation in February (f/c market: 5.6% yr). The United Kingdom Nationwide property prices growth is expected to slow during 2022 as rates continue to rise (February f/c market: 0.6%).
United States: evolution of employment at ADP should bounce back from the omicron decline in January (market f/c: 375,000). the Federal Reserve Beige Book will provide an update on current economic conditions in Fed districts. FOMC Chairman Powell will testify before the House Financial Services Committee. Evans and Bostique will discuss the outlook for economic and monetary policy at separate events.
Crédit Agricole summarizes:
AUD: RBA still the ball and chain
The RBA left its policy parameters unchanged as widely expected and remained dovish in its accompanying statement. While the RBA continues to acknowledge that the economy is recovering strongly and inflation is rising faster than expected, the central bank continues to note that it is too early to conclude that inflation is sustainably within its target of 2-3%. The main uncertainties surrounding the inflation outlook remain the speed with which supply chain issues are being resolved as well as accelerating wage growth. On this last point, the RBA believes that it will take “some time” before wage growth picks up to a pace consistent with the inflation target. The RBA recognizes the Ukraine crisis as another source of uncertainty on the inflation front, but calls it an external shock, suggesting that the RBA will overlook this impact unless it shows signs of persistence. The RBA has said it will continue to monitor inflation developments, so we continue to believe the earliest time for a rate hike will be the central bank’s August meeting and after two surprises at rising inflation and a further acceleration in wage growth. Thus, the RBA remains a drag on the AUD for now. The currency, however, is boosted by high commodity prices and its appeal as a commodity-based inflation hedge.
USD: smiling, fast, rare
The short-term outlook for the USD appears to closely track the predictions of the so-called “USD smile” analytical framework that the currency will outperform during bouts of risk aversion and periods when the Fed is leading the global tightening cycle. Both positive values for the USD will be on display this week as investors continue to worry about the twin threats of the Ukraine crisis and the upcoming aggressive Fed tightening. On that day, the ongoing Ukraine crisis will attract attention as investors look for any signs that an end to the conflict is near. In addition, the focus will be on February’s manufacturing ISM as well as speeches by the Fed’s Rafael Bostic and Loretta Mester. Fed data and rhetoric may confirm that the recent escalation in geopolitical risks and economic sanctions against Russia may have only a limited impact on the US economy and therefore on the Fed’s outlook. This, in turn, should strengthen the appeal of the safe haven, high yielding USD. Beyond the “USD smile”, we also note that the recent exclusion of some Russian banks from SWIFT has led to a further shortage of USD in global currency markets which has manifested itself in the abrupt widening of currency swap spreads. In particular, the measures have disrupted global USD payments and forced global financial institutions to aggressively attempt to grab the currency. While the Fed and other central banks can address dollar scarcity, a concerted policy response can take time to coordinate. In the meantime, the USD may continue to trade at a premium.
The ECB and the RBA still have time on their side. But the Fed does not. We’re going to have to walk straight into the Russian storm.
With commodities now completely out of control, the AUD is struggling against the downtrend in the DXY. But the hysteria for commodities, and more specifically energy, is now entering the realm of demand destruction even as the Fed will have to tighten.
This is end-of-cycle dynamics and the global recession is rapidly approaching the baseline scenario. All we need now is a credit dislocation somewhere to end the cycle.
The AUD may hold while commodities boom, but if we head towards the end of the cycle, it and commodities will crash in due course.