On this Halloween, the combination of weaker German data and dovish comments from an ECB official spooked investors out of euros. The currency is in the midst of a nosedive against the U.S. dollar that began 3 days ago. The sell-off gained momentum when investors realized that the Fed was less dovish and the ECB more dovish than they had previously anticipated. This contrast led to an adjustment in positioning seen only in the euro and Swiss Franc as the dollar is trading lower this morning against all other major currencies. Support in the EUR/USD is at 1.36 and even if this level is breached, we do not expect the currency pair to trade lower than 1.3475.
With 10-year Treasury yields reversing yesterday’s rise and U.S. stocks opening slightly lower, Asian and European traders have had their opportunity to absorb the Fed’s less dovish bias. This means that it is back to fundamentals for now which explains why EUR/USD is down this morning but commodity currencies are up. The comm dollars are supported by stronger data from Canada and Australia as well as the Reserve Bank of New Zealand’s hawkish monetary policy bias. GDP growth in Canada exceeded expectations in the month of August. Economists had been looking for growth to slow to 0.1% from 0.6% but it grew 0.3%. This meant that on an annualized basis, GDP growth hit 2%, the strongest level since July 2012.
This morning’s U.S. economic reports on the other hand triggered only a small reaction in the dollar despite a solid Chicago PMI report. Manufacturing activity in the Chicago region expanded at its fastest pace since March 2011. The index jumped from 55.7 to 65.9 on a significant pickup in production, new orders and backlog. The number was so strong that investors were immediately skeptical and they have a right to be since manufacturing activity in the NY and Philadelphia regions slowed this month. We’ll have to see if this number is revised down next down. Meanwhile jobless claims dropped from 350k to 340k, which was less than expected. The state of California finally worked through its backlog and from here on forward the numbers should be clean. The only problem is that everyone knows that fewer firings do not translate into more hiring. At the end of the day, today’s economic reports will not shift expectations for Fed tapering and for currencies this means a limited reaction in currencies.