Dollar Shrugs Off ISM but Could Crash on NFPs

Investors took the US dollar and US equities higher on Tuesday following better than expected data. Service sector activity contracted at its fastest pace since 2009 but the decline in non-manufacturing ISM from 52.5 to 41.8 was better than the market’s 38.0 forecast. This cold comfort ahead of Friday’s jobs report was enough to ease the market’s concerns but the details of the report give us no reason to be optimistic about non-farm payrolls. The employment component of the report dropped to its lowest level ever and the same was true for new orders. This deterioration in two of the most telling aspects of the service sector illustrate the depth of the economic contraction in April. The trade balance in March also increased slightly more than expected. USD/JPY is biding its time but tomorrow’s ADP report, which is predicted to show -21 million private sector job losses could drive the pair to 106.00.

Meanwhile one of the big stories for euro today was the German Constitutional Court’s ruling that part of the European Central Bank’s bond buying program breached their mandate. Although euro traded sharply lower in response, it recovered a large part of its losses by the end of the North American trading session. Despite the initial response, the ruling has no affect on the central bank’s current bond buying activities or their Pandemic Emergency Purchase Program. The ECB needs to provide justification for their bond buys but at the end of the day, the Bundesbank is unlikely to restrict the ECB’s ability to do what it takes to mitigate disruption in the financial markets during a major global economic crisis. Many view this as a jab at the EU Court of Justice rather than the ECB as they supported the central bank’s controversial policy, which the Germans saw as a overreach in power. For the central bank the only real implication is that they will come under greater scrutiny. Eurozone data remains weak with producer prices falling for the second straight month. Retail sales are scheduled for release tomorrow and with contraction in spending in Germany and France, the broader release is expected to deteriorate as well.

The best performing currency today was the Australian dollar which rallied after the Reserve Bank of Australia’s monetary policy announcement. The RBA left interest rates unchanged, a decision that was widely anticipated and said they would not raise interest rates until there was progress made to full employment and they were confident that CPI was sustainably in target. Instead, they are ready to scale up bond purchases and do what is necessary to support jobs, incomes and businesses. Their official forecasts are due for release on Friday but broadly, the central bank expects the economy to contract 10% in the first half of the year, fall 6% over the year and for the jobless rate to peak at 10% in the coming months and settle above 7% at the end of next year. While these forecasts are grim and Australian PMIs were revised slightly lower, AUD rallied as the central bank did not signal an immediate need for additional easing. Australian retail sales are scheduled for release tonight which could be a big mover for A$.

The Canadian dollar also rebounded on better than expected trade data and higher oil prices. Canada’s trade balance widened to -1.4B from -0.9B which was less than the -2.5B consensus forecast. The price of oil rose to its highest level in 3 weeks supporting the move in the currency. The New Zealand dollar is in focus tonight with quarterly labor market numbers scheduled for release. Economists are looking for the jobless rate to spike but New Zealand’s labor market numbers may not be terrible because the data is for the first quarter and NZ’s lockdown began on March 25th, the very last week of Q1. The economy is also reopening so investors may look past weakness.