Chief Macro Strategist
Summary: The USD strength was nipped in the bud yesterday by a surprisingly weak September ISM manufacturing survey that came in well south of 50. But we need signs of a weaker services and consumption sector and labour market before drawing any strong conclusions in the near term on the US dollar, which may only weaken against safe havens if global sentiment deteriorates.
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.
The G-10 rundown
USD – the market very sensitive to the next data releases – where the reaction function is most clear for the likes of USDJPY as we discuss above in the event the balance of the data this week surprise strongly in either direction.
EUR – the euro looking weak versus the JPY as well as EURJPY bears look ready to re-engage here for the balance of the month in the event the mood remains downbeat on the global economic outlook and yields continue to fall.
JPY – still keeping an eye on the sudden injection of volatility into the JGB market, but if yields generally falling elsewhere, likely to drive JPY weaker, though traders may be reluctant to commit beyond the next couple of weeks as we know the BoJ is gearing up for fresh policy moves at its October 31 meeting.
GBP – we know the outlines of what Boris Johnson will do today, but how will the EU side respond, and if the response is a categorical refusal to even negotiation the points of the deal, sterling could risk tactical downside.
CHF – EURCHF mimicking EURJPY yesterday, but not today – still get a sense that something fiscal this way comes in the EU eventually – upside optionality in EURCHF of interest over the three to six months horizon.
AUD – Notwithstanding RBA governor Lowe expressing hope that the Australian economy “appears to have reached a gentle turning point” (others might call it a dead cat bounce) AUDUSD is trading very heavily still as risk sentiment weighs and AUD at risk from ongoing fears of a global growth slowdown. And we have yet to hear more explicit discussion from the RBA on what happens once it reaches the effective zero bound on policy. Aussie 2-year government paper has plunged to new lows below 65 basis points this morning.
CAD – Canada’s PMI managed above 50, but we still hold the general opinion that the market is complacent on the BoC trajectory and risks to the Canadian economy and CAD on a growth slowdown. Technically, however, we need that rally and close north of 1.3300 in USDCAD to have evidence that the market is catching on.
NZD – the kiwi passive here and it takes heavy lifting to get the rate expectation spread below that for Australia, so we may risk more near term consolidation lower in AUDNZD:
SEK – EURSEK pointing higher and further weakness in risk sentiment on the global growth outlook could see the pair trading north of 10.85 and into 11.00+.
NOK – if risk sentiment and oil prices continue to weaken, EURNOK risks a trip north of 10.00 and could drive significantly above if reasonable separation is achieved as there is likely a consensus domestically – based on chart action as well – that this is some absolute barrier.
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