The Australian Dollar
The Aussie bulls are getting trampled by the sheer volume of US dollar buying that's occurring across the G-10 complex, in what is shaping up to be a painful week for the AUD.
Dealers in New York certainly had their way with the AUD overnight, hammering the pair from .7740 to 7570 before profit-taking set in. It is very much a yield play, as the UST10Y is soaring on heightened inflation expectations of Trump's impending fiscal policies.
China was also paring its US treasury holding, but it is debatable if this is a warning shot across the US bow on the possibility of trade sanctions, or if it is out of sheer necessity for USD balances. Given the massive uptick in capital outflows from China, we can only expect this pressure to increase.
My view is that China’s US bond dump is about demand for US Dollar, which highlights growing concerns about financial stability in the mainland, amidst inflating asset bubbles and burdening bad loan provision.
We are likely seeing the AUD as the liquid China economic proxy. Traders are aggressively shorting the AUD as opposed to more illiquid Chinese assets. What’s toxic to the AUD is that the US may possibly renegotiate its global trade policies and practices, coupled with higher US interest rates.
The Japanese Yen
USDJPY is the favoured pair for the street to express their bullish dollar view. With massive US fiscal stimulus in the pipeline, corporate tax reform and the possible acceleration for US interest rate hikes, the stars would seem perfectly aligned for further USD strength. The US economy and Federal Reserve are about to do the heavy lifting for the beleaguered Bank of Japan.
The PBOC are caught between a rock and a hard place in the face of a strong US dollar and huge waves of Capital outflows. The market is pending clarity on the trade front, but I suspect if, or when, any global trade policies are implemented, they would be executed in a very controlled fashion to have limited impact on the global economy.
Chaos in EM markets is due to pure bond yield play, which is driving capital flows from EM Asia to the US capital markets and is less about the possibility of adverse economic impact from global trade disruption. If there were concerns about economic fallout from any new trade policy, the Fed would not sound so hawkish.