• Why the future looks shaky for the Aussie dollar
• We were four years ahead of the mainstream on this
• Bonds are flashing a red alert

By Shae Russell in Albert Park

Did you know the third Monday of January is called ‘Blue Monday’? And that it’s claimed to be the most depressing day of the year? Apparently, it’s the day most people come back to work after Christmas.

Whether true or not, forex observers bullish on the Aussie dollar may indeed be feeling a little blue.

In my view, I think it pays to watch what the Aussie dollar does this year. Most mainstream analysts are tipping the Aussie dollar will remain high in 2018.

It’s easy to understand why they say that. The Aussie dollar has had a strong start to the year. However, it may be more cyclical than anything to do with the underlying strength in the Aussie dollar.

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The rally in the AUD began a week before Christmas last year. The AUD/USD exchange rate was at US$0.7656 on 21 December. As at this morning, it’s trading at US$0.7912. A gain of 3.34% in just four weeks.

AUD/USD — Two hourly/60-day chart

Source: CMC Markets
[Click to enlarge]

Not a bad way to start the new year. But the rise may come as a surprise to some.

After all, the US Federal Reserve Bank raised the cash rate to 1.50% last December. Locally, the Reserve Bank of Australia held the cash rate at 1.50%.

Normally, the US and Australia having the same interest rate would spook the markets.

That’s because of something called interest rate parity. Essentially, this means that there’s little incentive for foreign capital to invest in Australia. If both countries offer the same cash rate, investors are more likely to stash their cash in the US rather than Australia, which is perceived to be a slightly riskier currency. 

In spite of this, the Aussie dollar is getting a boost from stronger commodity prices. Recent price rises have helped push the dollar higher. Australia is a major exporter of copper, zinc, lead, iron and silver. As the value of these commodities started rising towards the end of 2017, it took the Aussie dollar up with it.

Head of FX Strategy at National Australia Bank Ray Attrill suggests we shouldn’t get comfortable with the strong Aussie dollar, saying: 

‘Seasonality is also supportive of further commodity price gains in January. The CRB index has a tendency to rise at the start of the year. The Bloomberg heat map shows positive returns in eight of the last ten Januarys. If history repeats, the AUD is likely to continue drawing support from commodity prices in coming weeks.’

CRB Core Commodities Index

Source: Pound Sterling Live
[Click to enlarge]

From the chart above, going back a decade, you can see that commodity prices have a consistent track record of rising more in January than in any other month. In fact, in the past decade, only twice has the value of the core commodities fallen (in 2010 and 2015). And both times, those falls related directly to Chinese government spending.

This is something Atrill points out. In his recent note, he mentions solid manufacturing data from the Middle Kingdom is likely to support the rise of commodity prices for now, while warning about the longer-term prospects:

‘Looking further out, we still contend that commodities will be less AUD-supportive over the course of 2018. The relationship between China’s growth and commodities demand versus China’s monetary conditions works with a lag and the full impact of tighter conditions over the past few months have not yet worked through.’

While Atrill is cautious about the Aussie dollar’s outlook for the year ahead, the Big Four Aussie banks reckon the currency will hover around the mid-70-cent range.

In contrast, Hans Redeker, head of FX Strategy over at Morgan Stanley, says the Aussie dollar is similar to the Canadian and New Zealand dollar. He says the three currencies have seen years of economic growth out pacing income growth. He told markets last week:

‘The dominance of US rates in determining global funding costs resulted in local funding costs remaining inappropriately low, given the local needs of these economies, leading to a leverage boom.

‘Now, as these economies are running out of balance sheet leverage space, which reduces their growth potential, the US is pushing nominal rates gradually higher, creating further headwinds.’

Redeker is saying that these three currencies have risen much higher in value than they should have. And that people should be aware that all three are likely to weaken against the US dollar now that the Federal Reserve Bank is getting ready to increase interest rates again this year. 

Because of this, Redeker forecasts that the Aussie dollar is going to tumble below 70 US cents. That would mean that the Aussie dollar’s rally is likely already over.

Kind regards,

Shae Russell,
Editor, Markets & Money

We Were Four Years Ahead of the Mainstream on This
Sam Volkering, Editor, Secret Crypto Network

It’s the largest global gathering of technology and innovation. It draws around 180,000 people. They come from all over the globe. There are around 4,000 exhibiting companies. Around 2.6 million square feet of floor space to cover.

It turns Las Vegas from Sin City to the City of Tech for a week every year in early January.

It’s, in my view, the best tech conference and exhibition in the world. It’s giant. It encompasses the whole of Vegas. The convention centre turns into a mini city. The hotels host parties, exhibitions, events, and special days.

Even the Las Vegas strip is shut down time and time again.

The future on display

It’s CES. Previously called the Consumer Electronics Show, but now so famous that the acronym has replaced the name. It’s a giant consumer technology trade show put on annually by the Consumer Technology Association.

It’s an event where you get to see, touch, feel, and hear the future of tech. And it happens years before that tech actually hits the mainstream. It’s a bonkers week. You’re going from early in the morning until the late hours of the evening.

I usually go every second year to really get a gauge of how fast tech changes. I went last year and it was epic. I took a ride in a self-driving car. A big Audi Q7 drove me around with no one in the driver’s seat.

I saw a personal drone like a flying taxi, though sadly didn’t get to ride in it. I saw the future of wireless charging, home entertainment, smart homes, and smart cities. What the world of AI, automation, robotics and cars has in store for us.

Every second year when I don’t go — like this year — I get CES withdrawals. Which is why I’m desperately looking forward to next year’s event.

I attend CES to uncover the hidden gems that show me where investable opportunities will lie — well before the mainstream catches on. One thing is for certain: You can’t escape the fact CES has become the place to preview the future.

It’s all about three years ago

You might have seen some of the coverage from CES this year. Maybe you caught it on the news.

Easily the biggest thing coming out of CES this year was self-driving cars. It’s taking the world by storm, capturing the imagination of the mainstream everywhere.

No longer are self-driving cars a possibility, they’re a reality. It’s not about ‘if’ they’ll come, just ‘when’.

But this isn’t a new story to us. Nor to you, we imagine.  

I first started following this story with great interest in 2013. But the confirmation of just how fast it was coming came in 2014. You see, 2014 was my first venture to CES. And it was there I uncovered the future for myself.

About three years ago I saw the huge number of car companies exhibiting at CES. Now, I’ve also been to my fair share of car shows. And to me it seemed like CES was becoming more like a car show than a consumer technology show.

Truth is the two were at the start of an eternal relationship. You should view car companies today more as tech companies. The innovation and development car companies push out is astounding.

Every year Volkswagen, Ford, GM, and Daimler-Benz all top the world’s biggest R&D spenders. It’s astonishing the amount of money they spend on new tech. And in 2014 it was all about two things.

Immersive entertainment tech inside the car.

Self-driving tech everywhere on, in and around the car.

They didn’t have entire fleets of self-driving cars to shuttle people around. But they certainly were happy to talk about it. And the people in the know were saying this is coming way faster than people realise.

It confirmed my views and research. And I went all in on self-driving car recommendations. Some of those stocks more than doubled in price. One in particular rose more than 1,000%, and is still going.

But it was a future that we saw four years ago. And only recently have we started to reap the rewards.

With cutting-edge tech there’s no way to know exactly when things will take off. But with the right amount of insight and research, you can get in early enough to be ready for it.

Speaking to the people that make it. Touching the technology for yourself. Taking a ride in a real life self-driving car. These are all the things you need to do to become an expert on the opportunities for investors.

That hands-on approach to research is a lot of fun. But it’s also just what you have to do to really get underneath the hood and find the best new tech.

We were about four years ahead of the mainstream for self-driving cars. And we were 100% right about them.

We were about three years ahead of the mainstream when it came to the cryptocurrency boom. And we’ve been right about that to the tune of thousands of percent in gains.

The only question we ask ourselves, today and tomorrow and every day, is what the next huge breakthrough we’ll be three years ahead of the mainstream on.

Regards,

Sam Volkering,
Editor, Secret Crypto Network

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Bonds Are Flashing a Red Alert
By Bill Bonner in Baltimore, Maryland

‘Investors Prepare for Inflation,’ warned the front page of The Wall Street Journal on Wednesday.

‘Rising Treasury Yields Ripple Through Markets,’ it added on Thursday.

‘U.S. Treasurys lead bonds sell-off,’ the Financial Times piled on, ‘as investors fear a faster retreat from crisis stimulus.’

These headlines may herald the biggest financial turnabout in 35 years.

Stocks are hitting record highs. But bonds are slipping.

Courage of a quack

For three and a half decades, inflation and interest rates — which tend to travel in the same direction — have gone down.

Now, they are going up.

The yield on the 10-year Treasury note — an important benchmark for borrowing costs in the economy — fell to 1.37% on 8 July 2016.

Since then…

‘Another drop in bond prices sent the yield of the 10-year Treasury note above 2.5%,’ says the Journal.

But what does it mean?

Shaping up in front of us is a delicious farce, a comedy of errors and ignorance, like The Three Stooges, but without the ‘nyuk, nyuk, nyuk’.

Fed chief Janet Yellen either didn’t see the bond selloff coming…or she didn’t think it was worth worrying about.

There is nothing ‘flashing red,’ she said in her last congressional appearance. ‘Or even orange.’

Perfect.

We mean, from a slapstick point of view.

Ms Yellen, then at the San Francisco Fed, didn’t see the crisis of 2008 coming, either. Instead, she turned her back and got whacked on the tushy.

Then, when the crisis hit, she had no idea what she was doing in the hysteria that followed, so she deferred to her fearless leader at the time, the hilarious Ben Bernanke.

This clown later modestly described himself as having the ‘courage to act’.

Courage?

The markets were correcting the damage done by excess credit provided by Greenspan, Bernanke, and Yellen, et al. But instead of having the cajones to let the correction happen, Bernanke panicked…giving it even more credit.

To the cheers of practically every investor, householder, politician and economist, he slashed interest rates and bought up bonds with newly minted digital cash (QE).

That is, he was the quack who gave the diabetics what they wanted: more sugary donuts.

Vermillion alert

And now, the world economy may be going into a coma…brought on by $233 trillion worth of debt — nearly all of it desperately dependent on Bernanke’s and Yellen’s absurdly low interest rates.

As for the alarming signal delivered by the bond markets this week, we’d put it in the vermillion category.

Why?

Bond investors are generally more professional and more experienced than stock investors; they are the so-called adults in the room.

So, as the stock market continues to punch holes in its ceiling, bond prices are taking the down elevator. And bond yields — along with borrowing costs throughout the economy — are going up.

In other words, the trend that has marked practically our entire adult lives — the sweet ‘stimulus’ that has fattened almost every price, business, loan, and financial hope on the entire planet — is turning sour.

Central banks, via various QE programs, have put out some $15 trillion in extra credit so far this century. But central banks give…and they take. What makes it funny is that they almost always do so at the wrong time for the wrong reason.

Now, with more people owing more money than ever before in history, central banks in the US, the Eurozone and China are either cutting back on their bond buying or shrinking the stockpiles of bonds they already own.

No more punchbowl

The Fed, for example, is on schedule to reduce the bonds on its balance sheet at a rate of $600 billion a year by the end of 2018.

Jens Weidmann, a German member of the European Central Bank’s governing council who is expected to take over as its president next year, has called for an early end to QE in Europe.

And China is not only backing away from money printing, it is also signalling it may not be keen on buying more US debt, either.

That leaves the Bank of Japan as the only major central bank still pumping in liquidity. But that last major source of worldwide credit seems to be tightening up.

Reports the Financial Times:

‘[T]he Bank of Japan trimmed purchases of 10- to 25-year debt by 10 billion yen to 190 billion yen [$1.7 billion]… the first reduction in the sector since December of 2016.’

And ‘if the world’s most assiduous user of quantitative easing is itself easing back on the use of the proverbial punchbowl,’ wonders an analyst at British broker IG, will this mean that the others ‘start to shift to a higher gear, earlier than previously thought?’

Maybe.

And we will add a wonder of our own: Could the central bankers have set up a better pratfall?

They lured the whole world to their party — promising free booze and canapés. And now, they’re not only putting away the liquor and turning off the lights, they’re setting the curtains on fire.

Stay tuned.

Regards,

Bill Bonner,
For Markets & Money

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