Australian Dollar

The global Bubble is bursting – hence financial conditions are tightening. Bubbles never provide a convenient time to tighten monetary policy. Best practices would require central bankers to tighten early before Bubble Dynamics take firm hold. Central bankers instead nurture and accommodate Bubble excess. It ensures a policy dead end -  the faltering global Bubble has progressed beyond the point where Fed rate policy has much impact.

Yellen's reaffirmation of a likely rate before year-end helped lift the dollar.  Look for some consolidation ahead of the US jobs data.  

News That Matters

The divergence meme that is the center of the dollar bull narrative was never predicated on precise timing of Fed's lift-off.   To go from no hike in September to Fed will never raise interest rates, or QE4 is next, is a needless exaggeration.  

So far, it’s a different type of crisis – market tumult in the face of global QE, in the face of ultra-low interest rates and the perception of a concerted global central bank liquidity backstop. It’s the kind of crisis that’s so far been able to achieve a decent head of steam without causing much angst. And it’s difficult to interpret this bullishly. If Brazil goes into a tailspin, it will likely pull down Latin American neighbors, along with vulnerable Indonesia, Malaysia, Turkey and others. And then a full-fledged “risk off” de-risking/de-leveraging would have far-reaching ramifications, perhaps even dislocation and a collapse of the currency peg in China. China does have a number of major trading partners in trouble. Hard for me to believe the sophisticated players aren’t planning on slashing risk.

A review of the technical condition of the dollar in the days leading up to the FOMC meeting announcement.

Divegence driver of the dollar was never predicated on a particular time frame for the Fed's lift-off.  Others are easing.  Trajectory is the key.  Here is my sense of the near-term dollar outlook, wiht a look at some other asset markets as well.  

Dollar recovered from the exaggerated panic at the start of last week.  Outlook is still constructive.  Here is an overview of the technical condition of currencies, bonds, oil , and S&P 500.  

Steep losses in the dollar, stocks and commodities, for sure, but does it really signal a systemic crisis? 

China, Australia, Brazil, Canada, Sweden - it is beyond us how anyone can declare the crisis isn’t spreading. Be prepared – there are going to be lots of opportunities to both make and lose money. But first, you have to recognize what is happening.

Near-term dollar outlook, with some views on oil, Treasuries and S&P 500 thrown in for extra measure.  

While making its devaluation announcement, Beijing said that it wanted its currency "to reflect fundamentals" and to no longer simply mirror the movement of the dollar. It acknowledged the fact that its peg to the dollar was problematic and that it wanted a better, more natural mechanism. This is the key to understanding the announcement: The Chinese are preparing for a time in which the financial world does not spin in orbit around the dollar. Such a reality must make us think about the future.

"[The] devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil's real to Indonesia's rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen."

When China sneezes, the world catches a cold. Alternatively, when China devalues, the rest of the (exporting) world scrambles to not be the last (exporting) nation standing, and to do so next, before everyone else does. We give Russia, Thailand and India (as well as the rest of the EM countries, actually make that all countries, the US included) at least a few days (hours may suffice) before they all realize that in a beggar-thy-neighbor global currency war, where the ZIRP (or NIRP) liquidity trap is already stalking at least half of the entire world, there really is no choice.

To help remind readers of what happens when the entire world engages in wholesale currency war, here is a complete list of all the recent FX interventions, courtesy of Stone McCarthy.