Will US Consumer Save the Dollar Today?

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Market Drivers August 1, 2017
RBA unchanged
UK PMI Manufacturing beats
Nikkei 0.31% Dax 0.44%
Oil $50/bbl
Gold $1267/oz.

Europe and Asia:
GBP PMI Manufacturing 55.1 vs. 54.6
EUR EZ GDP 0.6% vs. 0.6%

North America:
USD ISM Maufacturing 10:00

The dollar remained weak but appeared to stabilize in Asian and early European trade today as markets awaited the start of busy US economic calendar that will culminate in Non-Farm payroll report at the end of the week.

In Asia the key event of the day was the RBA policy meeting which left rates unchanged and provided a generally upbeat assessment of economic conditions but warned that the rise in the Aussie exchange rate could slow growth going forward.

The RBA noted that employment growth has been stronger over the past few months and has increased in all states. Inflation is expected to remain at 2% with higher prices in electricity and tobacco sectors expected to be offset by competition in retail.

Although the RBA made an effort to jawbone the Aussie, the move was very subtle and was far less than what AUDUSD shorts wanted. The RBA simply stated that an appreciating exchange rate would be expected to result in slower pick-up in economic activity and inflation than currently forecast. In effect the RBA was admitting that the Aussie is already having tightening impact on the Australian economy and that dynamic will keep the central bank neutral for the foreseeable future.

In the end the rally in Aussie which has been driven primarily by carry trade flows will depend on how well or poorly the US data prints this week. If US numbers prove supportive, the rise in US yields will cause a natural correction in AUDUSD with the pair trading back to .7900. If on the other hand the data shows a slowdown in US growth, the Aussie could challenge the multi-month highs as .8150.

Elsewhere, cable was better bid in the wake of stronger PMI Manufacturing numbers which printed at 55.1 versus 54.4.Job creation was one of the strongest readings in three years as the pick in EZ activity and low EURGBP exchange rate are clearly helping UK manufacturers. Still, manufacturing represents only 10% of the UK economy and the market will far more interested in the service PMI due later this week. Technically, however, cable remains is a very strong position and now having taken out the 1,3200 level the pair could challenge highs in the 1.3300-1.3400 corridor over the near term horizon.

In North America today the focus will turn to Personal Income and Personal Spending data due at 12:30 GMT. The forecast looks at tiny 0.1% rises in each, but stronger print along with a steady reading in ISM Manufacturing could help stabilize the buck and stage a counter trend move after so many days of selling. If the data however, offers no solace to dollar bulls we would see fresh multi month highs in most of the majors before the day’s end.

Boris Schlossberg
Managing Director

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