HSBC: Australian dollar to roar to 84 cents

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The USD is in free fall against pretty much everything today:

But AUD is also strong versus EMs on yesterday’s solid data:

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Gold was firm:

Oil too:

Base metals were not:

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Big miners bounced anyway:

EM stocks blasted higher:

Junk firmed:

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US yields climbed, curve flattened:

Bunds did nothing:

DXY free fall put a rocket under US stocks roared, EZ did nothing:

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The US boom is going nuts now. Tax cuts, low unemployment and lowflation, house prices clattering, stocks roaring, shale recovery coming and now a collapsing currency. Hang on! The market is giving the Fed permission to ratchet up rate hikes.

The Aussie blasted through 80 cents. HSBC currency strategist Tom Nash says it’s going to 84 cents:

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Overall, risks appear asymmetric in favour of developments in the balance of payments supporting the rise in AUD-USD towards our year-end forecast of US84c.

Global growth is more supportive of higher commodity prices than in the recent past and history tells us that some of the windfall will find its way through to the economy, providing a cyclical tailwind for the Australian dollar.

We also think it is unreasonable to say that all of the gains in the resource sector will go to foreign shareholders via dividends and see no unhealthy signs in the shrinking of the financial account.

Even if key commodity prices correct from here, as many analysts and even the Australian government expects for iron ore, the AUD should be cushioned as it has not fully tracked the upswing in prices.

By contrast, if the improvement in Australia’s external position is sustained for longer than most expect it would leave the AUD undervalued. Another reason to buy the currency in 2018.

This follows Bloxo’s pronouncement late last year:

After a lacklustre 2017 for the local currency, a looming shift in global monetary policy is likely to support gains for the Aussie dollar, HSBC chief economist Australia and New Zealand Paul Bloxham said.

“Looking into 2018, we see the Australia dollar climbing, as we expect it to get support from a lift in global growth, which is expected to support commodity prices, and we expect the RBA to lift the cash rate in 2018,” Mr Bloxham said.

…Mr Bloxham said currencies tend to lift ahead of rate hikes, and predicts a similar force to be at work in 2018.

“We expect the Australian dollar to head towards 90 US cents,” Mr Bloxham said.

Not so stupid now. The current inflationist trade could get us there if the EUR/USD were to fly through 130 triggering a mad monetary rush for commodities.

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If it happens it’s one of those trades that contains the seeds of its own demise. If the USD keeps falling in this way, the Trump boom will overheat and the Fed be positioned for four 2018 rate hikes by mid-year, well ahead of today’s market pricing. That ought to prevent the USD from falling at all. We can see this in the widening gap between interest rates spreads and forex between the US and Europe:

The Chinese slowdown should become more apparent through Q2 as well, weighing on commodity prices. Still, I wouldn’t rule out a mad AUD spike in the short term if bulk prices rally on Q1 weather issues and/or China’s Winter shutdowns but, again, the base case is that it would be temporary.

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Deutsche’s Tim Baker also weighs in today, but as a bear given he sees no rate hikes against market pricing for one:

1. Employment data has been exceptionally strong of late. Lead indicators suggest that this Thursday’s print will be solid, but sooner or later there’s the risk of a disappointment. Both the growth in jobs, and the outcome vs expectations, are running around historical highs.

2. The RBA has tended to signal its discomfort with the level of the AUD as it approaches 80 cents. Even a mild change in tone in the RBA’s early February communication could see pricing for a rate hike drop.

3. We think better consumer spending of late is mostly a wealth and holiday effect. Later in Q1 we expect spending growth to moderate, given wage growth remains soft. Australia’s wage growth is lagging peers, and historic relationships suggests AUD downside.

4. There’s excitement about real GDP growth picking up in 2018, but we think nominal growth matters more. For most countries the two measures move closely together given inflation is fairly stable, but Australia is a notable exception, given the terms of trade swing around a lot. The bad news is that nominal growth has more downside than upside this year, as the best of commodity price growth has been seen. Over the past 15 years, the RBA has generally hiked when nominal GDP growth was 7% plus, but the growth rate now is 6% with downside risks.

I agree. But, even if wrong, if DXY keeps falling and driving up the AUD then the S&P500 will rise even faster (especially relative to a crushed ASX) so the MB Fund is still positioned right being underweight Australia and overweight US. We’re still showing roughly 2% returns in the international portfolio for January despite the runaway AUD.

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David Llewellyn-Smith is chief strategist at the MB Fund which is currently long international equities that offer superior growth so he is definitely talking his book.

Here’s the recent fund performance:

 Source: Linear, Factset

The returns above include fees and trading costs on a $500,000 portfolio. Note that individual client performance will vary based on the amount invested, ethical overlays and the date of purchase. The benchmark returns do not include fees. October monthly returns are currently at 4.9% for international and 4.2% for local shares.

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The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. The MB Fund is a partnership with Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.