FX Update: USD consolidates despite scorching hot US data

FX Trading focus: Another hot US data point, but the US dollar dipped.

It is fairly easy to sketch the rough outlines of a narrative that explains the strength in US data of late, including last week’s enormous jump in the monthly consumer confidence survey, a strong 900k+ surge in the official nonfarm payrolls and then yesterday’s cherry-on-top, a record March ISM Services survey reading of 63.7 (which included a record New Orders sub-index of 67.2 to boot). It’s all about the stimulus combined with the emergence from Covid lockdowns.

The reaction in markets is another matter, and here the narrative is trickier to conjure up, particularly in the Treasury market. The over-the-top, strongest ever pace of improvement in the us services sector, as represented by that ISM Services survey jump, merely elicited a shrug of the shoulders at the longest end of the yield curve, while a jump in yields in the “belly” of the US yield curve faded yesterday after a go near 100 basis points for the 5-year treasury benchmark.

What’s the story there? Sell the rumor, buy the fact? Or is the flattening of the longer end of the yield curve more an expression of that anticipation that the pace of improvement may not get any better than it is at present and that the key question will be whether there is any further ability for the economy to surge in the wake of the sugar high of the latest round of stimulus checks and the last few rounds of acceleration as the last areas fully emerge from Covid restrictions in the coming few months. The intent with the next round of stimulus, the political signals suggest, will be offset with new taxes.

In any case, the combination of strong risk sentiment on these numbers together with no new upside pressure on yields has helped the US dollar weaker. For the US dollar to get weaker still, we need an extension of this environment, or for the real yields elsewhere (and likely the nominal as well) to pick up more sharply in relative terms.

Chart: EURUSD
The EURUSD consolidation was quite sharp yesterday, and there is some cause for euro bulls to take heart now that the Euro is more attractively valued and that indicators like the Eurocoin growth indicator noted below suggest very powerful recovery building in Europe, the terrible failures of the vaccine rollout effort notwithstanding. Imagine where Europe may end up in relative terms to the US as the vaccine effort catches up, even if with a multi-month lag. The downside risk for the Euro does remain if we get another round of US yield rises – particularly real yield rises, without any improvement in the Euro-US real yield spread. But only a proper souring of the forward outlook or a nasty global deleveraging would seem able to push the euro below perhaps 1.1600-1.1500, and we’ll be on the lookout for a bullish reversal at any time. At the moment, we would need a solid pull-back toward 1.2000 to neutralize this latest sell-off wave, a bit of a steep wall to climb.