Why Dollar, Equities Extended their Slide after ISM

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Stronger than expected service sector activity failed to provide support for U.S. assets. Having initially traded higher on the back of the non-manufacturing ISM index, U.S. stocks and USD/JPY have given up all of their post data gains. The greenback is still up on the day versus other major currencies but it is losing ground quickly. Despite the decline in manufacturing activity, service sector activity accelerated in the month of January and more importantly the employment component rose to its strongest level since November 2010. With companies in the service sector adding jobs at a faster pace, a rebound in non-farm payrolls is a certainty.

However based on the price action of the U.S. dollar after this morning’s release, investors are uncertain about the magnitude of the increase. Given the slowdown in job growth reported by private payroll provider ADP, non-farm payrolls growth could still fall short of the market’s 182k forecast. Investors are worried that the U.S. recovery is losing momentum with the problems exacerbated by the Federal Reserve’s taper policy. Markets sell-off on good news when market participants eye every piece of data with caution and investor skepticism is fueled by the negative impact of inclement weather. The Northeast is being hammered by more snowstorms and if recent data can be a guide, the storms can have a temporary but notable impact on the economy.

The S&P 500 dropped to its lowest levels this year and if the selling continues, risk aversion could drive USD/JPY to fresh 2-month lows below 100.75. 2014 FOMC voters Tarullo and Plosser will be speaking on the Volcker Rule and the economy later today and if either Fed President touches on the labor market or unemployment rate, it could have a significant impact on the greenback.

Meanwhile the reversal in the dollar rally has driven EUR/USD higher ahead of the European Central Bank monetary policy meeting. Here’s a look at how the Eurozone economy changed since their last meeting in January.

Kathy Lien
Managing Director

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