ToT is not for me

AUD couple

Tim Power (Spectra FX Solutions) has been pointing out the big news out of China as Beijing fires up the world’s largest dam project ($167B, see here). Cement and other basic materials stocks in China are going up faster than Kohl’s. Precious metals have been en fuego for ages, but now basic materials are joining the party and of course US copper prices are exploding on the tariff news.

The fundamental issue here is whether any of this matters for AUD. In the good old days, higher commodity prices meant increased capex in Australia and this created nearly instant transmission to jobs and inflation in Oz. Now, higher commodity prices trigger bigger dividends and higher stock prices for the miners, but not much new investment and not many new jobs. Same story in Canada. Commodity prices and currencies have lost their connection. For full explanations on why terms of trade (ToT) and commodities and CAD, AUD, and the USD have lost their relationship.

The thing is, if you’re long AUD, would you rather commodities were going up and China was doing infrastructure? Or the opposite? Obviously, it feels better to be long AUD when the chart looks like this:

I am not bearish AUD, but I am skeptical as to whether higher commodity prices will mean much for the currency as the relationship broke down years ago as capex peaked (see chart at right).

The real driver of higher AUD is more likely to be Aussie superfunds hedging their USD exposure and/or a hawkish RBA. I don’t think there will be any transmission from this commodity price ramp into Aussie jobs, inflation, or RBA policy. Without that transmission, you will get more episodes like we’ve seen in the past where terms of trade improves, but other factors drive the currency.

You might wonder what the point of writing a page and a half about AUD is when I don’t have a view. Tim might think I am trolling him—but I’m not! I just think it’s an interesting moment for the currency as we are back at the top of the range and there is an okay narrative around the infrastructure spending in China. And I think it’s a worthwhile debate whether this matters for AUD.

I don’t think it does matter, but I will keep an open mind. And rising ToT is certainly not bearish AUD; I just think it’s a red herring. Look at mid-2024, for example on the chart on page one. ToT ripped, and AUD briefly popped, then chopped, then flopped.

Here's the AUDUSD chart for good order. Approaching the top of the post-Liberace-Day channel.

Long AUD up here feels particularly risky into next week’s Superstorm of events. But short AUD feels nonsensical.

Japan

I am not saying this is going to happen, but if you’re not at least prepared for an Ishiba resignation, you might be disappointed at some point in the next eight days. This chart courtesy of James Harris (Spectra FX) shows the action last night. Japanese politics is weird! There have been 102 Prime Ministers of Japan since 1885.

An Ishiba resignation would be bearish global bonds and bullish USDJPY initially and then we would have to see where the chips fall.

An Ishiba resignation would be bearish global bonds and bullish USDJPY initially and then we would have to see where the chips fall.

Memes

Koh’s is going nuts and DNUT and RKT are today’s flavors as a mild meme stock frenzy has returned. I was curious whether past meme stock frenzies were bearish indicators as they would seem to indicate peak froth, liquidity and greed. The results are not conclusive. The chart (at right) shows times when the word “meme” appeared in 250% more Bloomberg stories than the prior 10 days.

I would have thought the red lines would coincide with major peaks, but they don’t. They did signal the best entry points during the 2022 down trend, but had no signal value during up trends.

Final thoughts

I acknowledge that today’s am/FX offers little in the way of actionable information. Sometimes when you do research, the null hypothesis results. I do still think that this can be useful. For example, my intuition was that meme stock frenzies tend to occur around index peaks, but they don’t. So I can cross that off my list of reasons to be bearish NQ as the seasonality turns.