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USD Detaches From The Pack, Highest U.S. ISM In 14 Years

Published 09/05/2018, 02:43 AM
Updated 07/09/2023, 06:31 AM

The US dollar topped the leaderboard on Tuesday, as market participants in NA returned from a long weekend. The strength seen in the currency came even as the risk environment remained broadly supportive, with the US 30 year US bond yield up 4bp to 3.06%, Gold down testing $1,190.00, while the S&P 500, which remains disconnected from the general risk sentiment, was down 0.17%, although way off lows, as it tracked heavy losses in the Euro Stoxx 50, on the red by 1.05%.Note, in the latest CoT analysis, the absence of open interest in the latest ‘risk-on’ leg from late Aug implied the market was starting to show spells of exhaustion to prolong the weakness in both the US dollar and the yen.

A source of concern, even if shrugged off judging by the most recent ebbs and flows, continues to be emerging markets, with a basket of currencies including the South African rand, Argentine peso, Indonesian rupiah or the Turkish lira trading painfully low by historical standards.Even if just temporarily, the market focus was elsewhere (USD strength), thus strains in emerging markets were not sufficient to invigorate the Japanese yen this time, which traded quite soggy for most of the day, although other currencies made merits to perform worse, as is the case of the oceanic currencies or the Canadian dollar.

The initial reaction by the Aussie to another repetitious RBA monetary policy statement on Tuesday, was to squeeze late shorts, as the market was expecting a more dovish tone, although as the day progressed, those gains were given back to its full extent, a reflection of the lingering pessimism towards the Aussie, as the pricing of any RBA rate hike has been recently pushed further away into 2020. It’s business as usual for the RBA, with no intention to modify in the slightest its neutral outlook in rates. Taking the worst performing currency spot amongst the G10 currencies though, was the Kiwi, with a poor dairy auction not helping.The Canadian dollar, meanwhile, still trades as a function of the ongoing NAFTA negotiations, and with no agreement in sight (for now), the market has been punishing the currency. The major bearish outside day in the price of Oil won’t help.

The blockbuster US ISM manufacturing PMI, highest in 14 years, and which tends to act as a decent predictor of future US growth in the next 6 months, is yet another reminder of the Goldilocks state the US economy operates at present. The update by the Atlanta Fed GDP Now Q3 to 4.7% from 4.1% is just more fuel to throw into the fire. And while other low tier events out of the US such as construction spending, ISM manuf prices or economic optimism came to the downside, none could eclipse the cracking US ISM outcome. The improved outlook towards the US economy was reflected in the steepening of the US curve, with the Fed’s favorite measure (10y – 3 month) extending its recovery from its recent low at 0.76bp up to 0.82np.

Interestingly, Tuesday’s flows saw a very decent bid in the Sterling, with the Euro also proving to display a resilient profile but less so. The testimony of BoE’s Governor Mark Carney before the Parliament Treasury Committee, with the highlights being the comments on the economy operating as if there is a no-deal Brexit, with markets also cherishing, after receiving the blessings from UK PM Theresa May, the anticipation that Carney is to extend his tenure as Governor of the Old Lady (BoE) until 2020 to see through Brexit.

The GBP/USD found solid bids parked just ahead of 1.28, closing with only a handful of pips on the negative, which considering the strong flows into the USD, feels like a victory for the bulls, especially as the EU’s Brexit negotiator (Barnie) trashed the idea of Britain’s Chequers plan is dead in the water, suggesting May to aim for a Canada-style free trade agreement.

The rebound in the Euro off 1.1550 was quite convincing, yet still keeps the hourly structure for the next 24h firmly bearish unless acceptance can be found back above the 1.16. In terms of fundamental data, the most notable snippet of information came in the form of a headline that read the EU could adjust the Irish border backstop to win Britain’s approval in Brexit negotiations.

In the next 24h, expect a volatile Australian dollar as the country publishes its Q2 GDP data; if we were to see a miss, coupled with the recent escalation in consumer spending jitters, would not do any favor to the RBA and it risks tilting the balance towards a more dovish stance going forward. The day will continue with the release of a bunch of European PMI readings ahead of UK services PMI. Later in the US session, the focus will shift towards Canada, firstly on its trade balance, but the event to grab all the headlines is the BoC monetary policy decision, with the Central Bank, while still on a tightening campaign, will most likely err on the side of caution and hold rates steady at 1.5% until the NAFTA impasse period clears up.

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