Will Dollar Get Hit Again Today?

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Market Drivers Aug 3, 2015

UK PMI bit better at 51.9
EZ PMI Slightly better 52.4
Nikkei -.18% Europe 0.59%
Oil $46/bbl
Gold $1093/oz.

Europe and Asia:
CNY Caixin Final PMI 47.8 vs. 48.3
EZ Final PMI 52.4 vs. 52.2
UK Manufacturing PMI 51.9 vs. 51.6

North America:
USD PI/PS 08:30

USD ISM Manufacturing 10:00

It’s been a very subdued start to the week’s trade in the currency market with most of the major tracing out tight ranges amidst little newsflow and limited liquidity due to a banking holiday in Australia.

The weekend PMI data from China showed further deterioration in the country’s manufacturing sector with Manufacturing PMI sliding to 50.0 from 50.2 while the final Caixin Manufacturing PMI data ( which was formerly knows as HSBC) dropped further into contractionary territory to 47.8 from 48.3 the month prior. This was the lowest reading in more than a year and the fifth consecutive month that Manufacturing has contracted.

Although Chinese officials insist that the country will be able to maintain a growth rate of 7% – it’s difficult to see how such optimism is possible given the persistent slowdown in manufacturing activity. A pivot towards consumer spending will not offset the weakness in the industrial sector which remains the much more important factor in Chinese economy. Indeed it will be interesting to see if consumer demand retrenches in the wake of the stock market turbulence over the past month.

Although the data from China was dour commodity currencies saw little reaction to the news as most of the negative sentiment was already factored into the price. Both Aussie and kiwi wallowed near their Friday’s closes while USD/CAD popped to a fresh multi-year high of 1.3175 on the back of weaker oil prices. If crude continues to sink and drops below the $45/bbl rate it could push USD/CAD through the key 1.3500 level as markets begin to price in the prospect of a nasty recession up in the Great White North.

Elsewhere in Europe both the EZ and the UK PMI printed slightly better than expected with Spanish and German PMI showing some improvement while the UK PMI Manufacturing came in at 51.9 vs. 51.6. There was little reaction from the market however, as the news basically showed a static environment with little evidence of pick up in activity.

In North America today the focus will also turn to Manufacturing data with ISM expected to rise to 53.6 versus 53.5 the month prior. Given the jump in Chicago data on Friday chances are good the ISM should beat the consensus view. However the market may be far more interested in personal income and personal spending data due at 12:30 GMT. The call is for a sharp retrenchment in personal spending to 0.2% from 0.9% the month prior and a slight dip in personal income to 0.4% from 0..5%.

The report is going to assume an added significance in light of Friday very weak employment cost index data. If PI/PS show a marked decline traders will sell the dollar once again anticipating that the Fed rate hike will be pushed back to December. Despite the relatively robust labor growth numbers, the wage growth and consumer sentiment readings have been a steady disappointment to the market and given that backdrop the prospect of a Fed rate hike seems remote.

Boris Schlossberg
Managing Director

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