FX Update: USD knocked back by ISM, more important data ahead

Yesterday’s September ISM Manufacturing survey release of 47.8 vs. 50.0 expected triggered a run on fresh USD longs just as the big US dollar was poised near and beyond breakout levels in the likes of USDJPY and USDCHF. US treasury markets saw whiplash-inducing rally just after a local sell-off inspired by Japanese government bond market volatility. The Employment sub-component of the survey was a very weak 46.3 – worst since early 2016. The case for USD weakness is less clear-cut against risky currencies if the US recession is arriving sooner rather than later – note how heavily AUDUSD continues to trade and that EM put in a weak session yesterday in line with generally weak sentiment.

Indeed, global manufacturing PMI’s were generally negative this week save for a modest positive surprise in China at the outset of the week and minor distractions like Canada, where yesterday’s PMI remained bounced to 51.0 after four of the prior five months were (just) below 50. The US Markit survey, meanwhile, rebounded slightly to 51.0. The markets were clearly caught the wrong way around on the US dollar yesterday, but it will take corroborating data from the US services sector and labour market this week to cement this reaction as the services sector is several multiples of the manufacturing sector in driving growth. Today’s ADP employment change is the first test on that front, but the Friday payrolls data is the decided, especially if there is a pattern of weak surprises established by a weak ISM non-manufacturing survey tomorrow (the August ISM non-manufacturing survey data point bounced to a quite strong 56.7 and consensus for tomorrow is for a reading of 55.2)

Volatility risk for sterling later today as Boris Johnson will be out speaking to close the Conservative party conference, declaring his intended position on Brexit. That plan has been made public and has already been criticised by Ireland’s foreign minister. Among other points, it would eliminate the Irish backstop and place all of the UK in a separate customs union with special, temporary rules for Northern Ireland to last four years to deal with the Irish border issue. The negotiation deadline would be October 11, after which the threat is a no-deal if the EU doesn’t agree, notwithstanding the UK parliament’s law seeking to avoid a no Deal Brexit – in other words triggering some sort of constitutional crisis if Johnson moves forward with this plan and the EU rejects.

Chart: USDJPY
USDJPY was one of the centres of volatility around the US ISM Manufacturing data release yesterday, and the pair is classically exceptionally sensitive to US data releases, especially those that set the US treasury market in motion as yesterday’s ISM release did. Through the end of the week we should have a sense of whether the market believes there is mounting evidence of a US recession coming sooner rather than later – and that the Fed response to said recession in imminent. A close for the week clear of 108.50 points the needle higher, while clearly weak US data and perhaps new lows in long US yields, together with a close south of 107.00 sets the path back lower toward 105.00 and likely beyond if the Fed response proves sufficiently robust from here.