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ISM manufacturing key for Fed and USD

By Nick Parsons

This current phase of broad USD strength began almost two months ago when its index against a basket of currencies reach a low of 91.00. Progress higher since then has been steady and gradual; albeit punctuated by the occasional setback. On Friday last week it reached an intra-day high of 94.83 and subsequently it gave back around half a point to 94.30.

Yesterday, there was no great directional indicator for the currency and the USD index spent the whole day in a very tight range from 94.25 to 94.40. In the Asian session overnight the index managed a high of 94.44 but volumes have been light and it is pretty much unchanged this New York morning. Next up on the economic slate is the ISM report on manufacturing. September printed at a fresh cycle high of 60.8; the fastest pace of expansion in 13 years. This was driven by a jump in new orders to 64.6 whilst production was back close to its best level of the year and prices paid surged to 71.5.

Expectations for the October number are 59.4 for the headline index and if it is anywhere close to this level then the USD ought at the very least to consolidate its current levels and maybe even push on a little higher as we await the Fed statement early in the NY afternoon.

The Canadian Dollar has stabilized overnight after the GDP figures on Halloween really spooked investors. Analysts had looked for just a +0.1% m/m increase in August GDP after no change in July. Instead, the outturn was a -0.1% m/m drop as declines in oil and gas and manufacturing more than offset small gains in a majority of other industries. Manufacturing was a particular soft spot, with chemical manufacturing posting its biggest one month decline in 20 years, and other types of manufacturing being down because of planned maintenance shutdowns.

The service sector eked out a small gain of 0.1% and has now expanded for 17 months in a row but this was the first monthly contraction for the economy overall since October 2016. The FX reaction was pretty brutal – USD/CAD jumped almost 70 pips and the CAD fell on all its major crosses. We wrote here yesterday that, “last Friday’s high of USD/CAD1.2906 will be the level to watch in case of any further disappointment in the economic data” and the actual traded high was 1.2907.

Maybe we got lucky !! The Loonie is back on a 1.28 handle this morning but with the Bank of Canada now likely to sit on its hands for a long time, it would be a surprise if the CAD rallied much further.

The economic numbers in Europe were so good on Tuesday that investors have taken the day off to celebrate! A quick look at Wikipedia tells us that today is “a Christian festival celebrated in honor of all the saints, known and unknown. In Western Christianity, it is celebrated on 1 November by the Roman Catholic Church, the Anglican Communion, the Methodist Church, the Lutheran Church, and other Protestant churches.”

European stock markets remain open today, though, and have registered solid gains across the Continent, led by a very punchy +213 point increase in Germany’s DAX which stands at a record high of 13,435. French equities are up 0.4%, Spain is up +0.3% and the EuroStoxx index is 0.8% higher. In foreign exchange markets, however, the EUR has been much more subdued. Since the start of trading in Sydney overnight, EUR/USD has been trapped in a 25 pip range from 1.1628 to 1.1653 and there’s no great hurry to push it one way or another at the moment.

With the holiday today, the Eurozone PMI numbers are not being published until Thursday when we’ll also get the latest read on the German labor market. Spoiler alert: it’s pretty buoyant.

Two very strong days for the GBP at the beginning of the week have now turned into three days of gains after a better than expected set of manufacturing PMI numbers. With a headline number of 56.3, Markit (who compile the data) noted that, “The UK manufacturing sector started the final quarter of the year on a solid footing. Production and new order volumes continued to rise at robust rates, as companies benefited from strong domestic market conditions and rising inflows of new export business.

Price pressures remained elevated, however, with rates of inflation in input costs and output charges both accelerating and staying well above historical series averages. While trade from export markets slowed slightly, orders from overseas continued to rise for the 18th month supported by a robust global economy. The pound’s fluctuating performance may have had some bearing on the softening in export orders, but there were continuing good levels of demand from Europe and the USA so no cause for concern.” GBP/USD reached a one-month high of 1.3308 whilst GBP/CAD hit 1.7160; its best level since the beginning of June.

Short positions in the currency have been decisively squeezed out though it might well now require a very hawkish commentary around the interest rate decision on Thursday if the GBP is to advance further.

The Aussie Dollar is marginally higher this morning after some very conflicting second-tier economic data. There were a couple of readings on manufacturing activity with CBA’s PMI and the AiG indices both released. Quite why we need two indices to measure pretty much the same thing is a bit of a mystery, especially when they moved in opposite directions! CBA’s manufacturing PMI rose 1.7 points to 55.8 whilst the AiG gauge fell 3.1 to 51.1.

Pick the bones out of that… AUD/USD has spent every single minute since 5pm NY time last Thursday trading on a 76 cent big figure and we should be wary about overinterpreting a chart which has such a compressed trading range. What’s more, there’s been a bit more interest in the AUD/NZD cross overnight which has fallen almost a full cent from 1.1180 at Tuesday’s New York close to a low in the APAC session of 1.1085. This is the first time in almost two weeks that the pair has seen a 1.10 big figure and dealers who could only see upside price targets are now looking at technical support levels. The 20 day moving average is at 1.1095 and the 50 day at 1.1023.

It would be a surprise if this latter level were broken but AUD/NZD price action now presents another reason for a bit of caution on the AUD more broadly.

After 5 weeks of almost uninterrupted declines, the New Zealand Dollar finally caught a bid overnight. NZD/USD jumping 70 pips to 0.6910 and NZD/CAD over 80 pips high to 0.8825. The reason for this was a very good set of Q3 employment numbers. Unemployment for the three months ending September was 4.6 per cent, 0.2 percentage points lower than the prior quarter and the lowest level since the December 2008 quarter, according to Statistics New Zealand.

Surging demand for labour boosted the participation rate to a record 71.1%; a jump of 1.1 percentage points in the quarter whilst wages grew 0.7% in the quarter to take the annual rate of growth up to a five year high of 1.9%. Some of the increase was due to government-mandated pay rise for care workers and the new Labour government was elected with plans to raise the minimum wage more than 25% over the next few years which could also spill over into higher wages elsewhere.

Of course, we don’t know how much of the legislative programme will be enacted and there’s virtually no chance the RBNZ will raise rates next week or be signaling a hike in the near future. For the NZD, though, those falling knives which we talked about yesterday might well now have hit the ground. Maybe it is time at last to buy some cheaper Kiwi Dollars ?