Commodities

Australian dollar bids adieu to commodity mania

DXY is something to behold now as EUR is obliterated:

AUD actually held on for the night:

But, oil did not. She’s gunna break:

How’s that metals super cycle treating ya?

EM stocks are giving way:

As EM junk goes the way of all flesh:

Treasury yields held up as markets await the US CPI:

But stocks fell again:

Westpac has the wrap:

Event Wrap

US NFIB small business optimism index fell 3.9% to 89.5 in June – the lowest reading since January 2013. Weakness was broadbased. The percentage of those expecting a better economy fell to -61% from -54% – the lowest reading in the survey’s 48-year history.

FOMC member Barkin reiterated the commitment to getting inflation under control, but acknowledged it is a “really challenging” exercise to try to do that without knocking the economy into a “calamitous” decline.

Germany’s ZEW investor confidence survey index plunged to -53.8 in July – from -28 in June, and is the lowest reading since 2011. The result reflects concern that Europe will suffer badly as the US tightens policy aggressively to curb demand and battle inflation, while the standoff with Russia threatens energy supplies and risks rationing for the industrial sector.

Event Outlook

NZ: Both Westpac and the market expect the RBNZ to lift the official cash rate by 50bp to 2.50% at their July meeting in order to rein in elevated inflation. Meanwhile, food prices are set to rise in June given the seasonal increase in vegetable prices (Westpac f/c: 1.0%).

China: The trade surplus is expected to remain wide in June as export operations begin the early stages of recovery from lockdowns (market f/c: US$76.8bn).

Eur/UK: Supply issues will remain a headwind to European industrial production in May (market f/c: 0.3%). The UK trade deficit is expected to remain wide given the strength of imports (market f/c: -£8750mn).

US: Although annual consumer inflation is soon to crest, a solid lift in prices is still anticipated in June (market f/c: 1.1%). The Federal Reserve’s Beige Book will provide a qualitative assessment of conditions across the 12 districts.

Can: The Bank of Canada is expected to hike the policy rate by 75bp to 2.25% at their July meeting given the strength of inflation and record inflation expectations.

I suspect tonight’s US CPI may turn out to be a typical “sell the rumour and buy the fact” event given the levels of paranoia about it. That may provide some short-term relief to the AUD.

Still, we’re still not at the end of the commodity rout when oil has so far yet to fall:

When DXY and commodities have reconnected their long-term correlation:

And when a rising DXY comes with its own dividend of falling EPS that itself delivers a higher DXY:

I’m certainly getting itchy fingers. DXY strength is extreme. But so are the forces pushing it up and only one thing can reverse it.

The Fed must pivot but can’t yet.

Houses and Holes
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